Bulls & Bears
Recent financial market developments have many investors understandably nervous.
Tackling price inflation through higher interest rates has become a global phenomenon. Tighter than expected financial conditions indicate a meaningful economic slowdown, and recent equity market weakness reflects this.
This week, the U.S. equity market entered a bear market (>20% fall from the recent high). You might argue that at least some degree of a U.S. recession is already priced in, albeit short and shallow. As previously highlighted through our updates, Australia is relatively well placed due to favourable fundamentals and exposure to strong energy and commodity prices. Notwithstanding, issues in the U.S. tend to have ripple effects across the globe.
Historically, the average correction to the S&P500 during a U.S. recession is -36%, whereas, a non-recessionary market correction is -16%, suggesting we are close to an inflection point (months away, not years).
This period is a timely reminder that investment markets do operate in cycles. On the other side of a bull market is a bear market, followed by another bull market and a bear market. History suggests investors trying to ‘time’ market bottoms and tops are as reliable as a broken clock.
The short-term direction of markets over the near term is dependent on what happens to inflation, and this will continue to be a month-to-month assessment – surprises on the upside and downside are possible.
Warren Buffett famously said that diversification is a hedge against ignorance, which could not be more relevant in today’s market. Successfully navigating the current environment requires focussing on what you can control, like separating emotion from investment decisions and remaining diversified across quality assets.
Consistent with previous downturns, our private clients have weathered the storm relatively well, supported by a healthy allocation to Cash and Alternative assets.
Our portfolios are designed to bend, not break. Investors leveraged with speculative assets (crypto & meme stocks) tend to break at this point in the cycle.
We have been patient over the quarter, increasing Cash weightings in preparation for price dislocations that may arise over this transition period. The Advisory Board are starting to see some green shoots and will review these at length over the coming weeks.
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