After some stabilisation in March and early April, markets have continued their rapid trend down.
After some stabilisation in March and early April, markets have continued their rapid trend down in recent weeks. What began as a switch out of high-priced growth stocks into ‘value’ stocks as long-term interest rates started rallying has started to show signs of contagion, with other perceived inflation hedges such as gold and commodities falling alongside growth names.
So, what has changed so quickly? There are undoubtedly some negative headwinds facing investors, which, while not catastrophic and unprecedented as perhaps the GFC and pandemic were, are enough to lead to a significant de-rating. It also needs to be remembered that the S&P 500 and Nasdaq 100 soared past pre-pandemic highs less than a year after the pandemic began on the back of extraordinary monetary and fiscal stimulus. And that is the significant change in markets today: the unwinding of unprecedented stimulus to combat soaring inflation, effectively removing the biggest buyer in the market. Add to that continued lockdowns in China while the rest of the world is returning to normal and the war in Ukraine, and you can see why investors are selling first and asking questions second.
I think the critical thing to note in the paragraph above is that there is nothing about this sell-off that is unprecedented. Perhaps the impact on supply chains from the pandemic will linger, but other than that, we are seeing a very typical re-pricing of assets as inflation, and rising interest rates take hold. And the exciting part of this story is that as all stocks are sold off – irrespective of any fundamentals – opportunities begin to arise in some of the best companies on listed markets.
Looking at some of the Value Strategy, for example, there are companies growing sustainably, without the need for new capital, that have runways of growth of 10+ years. And yet they have sold off dramatically, irrespective of how their underlying businesses perform. Some of that is an appropriate re-pricing of the shares, but the rest is simply contagion, and that brings with it opportunity.
History has taught us that the best time to buy is after corrections and bear markets, which also applies to holding. Human nature guarantees that these times are the hardest to do just that, but without any systemic disruptions as we saw during the GFC, or forced business closures during the pandemic, we know that life will go on and companies will continue to grow and that one day we will look back and say how obvious it was that markets would recover over the long-term. So, my best advice is to remember your long-term outlook, ensure you are holding high-quality companies (because the lower-quality companies may not recover), and try to remember Warren Buffett’s adage to ‘be greedy when others are fearful’.
