Global stock markets hit new lows this week as the bear market continues, continuing a disappointing year. Understandably, many investors are frustrated. But frustration often triggers an impulse to action. It’s like regaining control in an uncomfortable situation. But this is so long into a bear market that such an impulse could easily backfire dangerously. The biggest risk you can take now is arguably dealing with the past.
If the past two weeks have felt like a bad case of déjà vu, your intuition is not far off the mark. It’s been a roller coaster year for global stock markets. After a rocky spring, global equities first crossed -20% on June 13th. This is the threshold for a bear market (usually a decline due to long-term fundamentals). A few days later, on June 17, MSCI World began a backlash. But two months later, the summer rally has subsided, and earlier this week global stocks fell -15.3% from his August 16th and -25.1% from his January 4th peak, hitting new lows. Recorded.[i]
Exhibit 1: Tough Times for Global Equities
Source: FactSet, as of September 27, 2022. The MSCI World Index will return in net dividends from September 30, 2021 to September 27, 2022.
Prolonged bear markets are frustrating and difficult, but important to remember. Investors looking for long-term stock-like returns don’t need to avoid a bear market to achieve their goals. Now, if we identify a huge multi-trillion dollar scale of negative growth that the market has yet to consider, it may make sense to reduce our exposure to equities. However, we do not believe that this bear market formed early enough to provoke reader action. It’s humbling, but it doesn’t change what we currently believe to be the wisest course of action.
If you don’t identify and act on a bear market early on, I recommend going back to basics. Yes we know. “Patience,” “patience,” etc. may sound like tired mantras, but that doesn’t mean it’s unwise. Sometimes things you don’t want to hear are right, important, and wise. Here are some such concepts. Selling now locks in losses, and if you were out of the market when the recovery began, it would be much harder to recoup those losses. You may be battling equal and opposing feelings that want to keep you aside. Again, avoiding negative perceptions is not essential to capture long-term market returns. The average annual return of 10.3% for the S&P 500 includes all bear markets from 1926 to 2021.[ii] In our view, market-matching returns are key if you want growth that matches the long-term results of equities.
And importantly, the market is looking to the future, so base your investment decisions on what lies ahead. Stock prices move the most in the gap between expectations and reality, so weigh how sentiment aligns with economic and political fundamentals. From what we have observed, you are in a very moody mood today. Investor and consumer surveys highlight pervasive pessimism, as does business activity. For example, the IPO market is having its weakest year in over a decade, mergers and acquisitions (M&A) activity is stalling, and dealmakers blame rising costs and fears of a slowing economy.[iii]
I am by no means saying that things are uniformly positive. We also cannot ignore headwinds from rising inflation and, in particular, rising energy costs. These can significantly impede growth in some parts of the global economy. But there are also signs that the reality is not as poor as many think. Let’s take a look at the Federal Reserve Bank of New York’s Global Supply His Chain Pressure Index. While still at historic highs, it has trended downward over the past four months, suggesting that pressure on global supply chains, one of 2022’s biggest concerns, is easing. .[iv] Ken Fisher, chairman and founder of Fisher Investments, recently took a comprehensive look at other sources of downward pressure on prices, from slowing money supply growth to narrowing fiscal deficits to falling commodity prices. did. real clear marketPolitics should also provide a tailwind heading into Q4 and 2023, when the US midterm elections are a big factor in reducing uncertainty. It’s only one factor, but it’s worth considering for investors. Finally, it is not uncommon for the market to test lows again during a bear market. And since historical returns are never predictable, it doesn’t mean that more downsides are automatically waiting before a recovery. And that’s the main question many investors are grappling with right now. Emotions are shaped and colored by the recent past, but it doesn’t help us predict what lies ahead.
[i] Source: FactSet, as of September 28, 2022. The MSCI World Index returns in net dividends.
[ii] Source: Global Financial Data, as at 28 March 2022. S&P 500 Total Return Index, 12/31/1925 to 12/31/2021.
[iii] “IPO stocks are down and demand for new listings is holding back,” said Corrie Driebusch. wall street journal26 September 2022 and “Shelved M&A Season Exceeds $150 Billion Due to Credit Troubles,” Manuel Baigorri and Ben Scent, bloomberg26 August 2022.
[iv] Source: Federal Reserve Bank of New York, Global Supply Chain Pressure Index, https://www.newyorkfed.org/research/gscpi.html, as of September 27, 2022.