There have been any number of articles written this year trying to liken the “sell everything” conditions that we have experienced in the first half of 2022 with periods of similar turmoil in the past.
Comparisons have been made with the 1970s, with the dotcom crash of 2000, and the Great Financial Crisis of 2008. Each of these have aspects that you can point to, but big differences remain with most others.
To be clear, we won’t find an exact replica wherever we search (nothing rhymes exactly) but Dhaval Joshi of BCA Research presents, to my mind, the most appropriate offering by suggesting that we look at 1981-82 as the most likely era upon which to base our “what happens next” scenarios.
This was a period when central banks were trying to re-establish credibility in their ability to combat inflation with the consequence that rates hit 20% in the States.
I’m not suggesting for one second that that is what to expect now, but we have a path along which most central banks are treading of raising interest rates to try to tame inflation, even if this means that recessions become the next thing to fret about.
Add to this the fact that two energy-crucial countries were at war (Iraq and Iran) causing havoc in the energy markets and we can tick more boxes in the “like for like” columns.
The clincher for me though is the Christmas Number 1 in 1981. It was none other than Don’t You Want Me (Baby) by The Human League. This could be the anthem for all growth stocks in 2022 – a remix by The Inhuman League of algorithms and quants as they sell anything and everything “growthy”.
Look at the table below. Some 94% of all stocks that make up the Russell 200 Growth Index had fallen by at least 20% by mid-June this year, with 82% of the Nasdaq 100 doing likewise. The valuation sell-off has been indiscriminate and brutal.
Source: 8AM
What Happens Next?
Of course, the simple answer is no one knows. In the full understanding that this is not particularly helpful, let’s have a stab at trying to elaborate. The chart below has to offer an optimistic slant on the rest of this year.
It shows that in the 5 years since 1930 that when there have been declines in the S&P 500 of more than 15% in the first half of the year, in 100% of cases the 2nd half of the year have seen positive returns, sometimes quite sizeable. How exciting!
Source: 8AM
Before we get carried away though, it’s worth harking back to 1981-82 again. Back then there was a similar valuation-driven sell off in 1981, followed by a bounce. However, markets didn’t bottom until later in 1982 after the effects of the higher interest rate trajectory had fed through to companies and their profits in the ensuing recession.
We can argue whether the coming months of 2022 into 2023 will lead to a defined recession or not, but I don’t think that anyone would be suggesting that a slowdown in growth is anything other than inevitable domestically and abroad.
One of my recurring gripes with economists and other forecasters is that they are too dependent upon data. Maybe they should be encouraged to get out more and mix with real people socially because they would anecdotally be able to realise that most “ordinary” people are already tightening their belts and, more worryingly, relying more upon credit cards to maintain their standards of living.
Fevertree was an example of a stock that was battered last week (down 32% at one point on Thursday) when it announced that the rising cost of glass and shipping was going to adversely affect its bottom line.
I’m not exactly going out on a limb when I suggest that they won’t be the last company to see their share price hammered on revised expectations. To my mind those companies where prices bounced in the re-opening euphoria may be amongst those most at risk of similar share price reactions.
Where May We Find Resilience?:
I’d like to think that profits will hold up better within the sectors that we concentrate on within our funds. Already, Samsung and TWSC have beaten estimates in the semiconductor field in the past two or three weeks. Our hope and expectation is that sectors that are necessary rather than optional will be similarly more resilient in the coming months – sectors such as healthcare, cyber security, cloud computing and alternative energy.
I found it interesting to see what had happened to the oil price during more recent recessions.
Early 80s recession – down 30%
Early 90s recession – down 60%
2000 dotcom bust – down 55%
2008 Global Financial Crisis – down 75%
2015 EM recession – down 60%
2020 Pandemic – down 75%
Of course, it may be different in the next recession, but I will be fascinated to see if those funds whose ESG filters have conveniently found it within themselves to include oil companies at a time when they have been one of the very few sectors to have delivered a positive return will re-examine their criteria should the above scenario play out.
Andy Merricks is co-manager of the 8AM Focussed fund. The views expressed above should not be taken as investment advice.