Peter Brown: Worst year for investors in a generation
This year we have the devil's cocktail of falling stocks and rising interest rates.
The year just gone has possibly been one of the worst for investors in a generation.
It has been a bad year for stocks, that is clear to everybody, with losses right across the board, and we have seen extreme declines in some cases, especially the tech sector.
Facebook-owner Meta, Elon Musk's Tesla, and Netflix have slid between 55% and up to 70%; Amazon and Google-owner Alphabet have lost over 40% of their value, and Microsoft and Apple have also suffered significant losses.
After a stellar end to 2021, stock markets ended a decade long rally and were already heading lower, even before the major worries of inflation, rising interest rates, and the Russian invasion of Ukraine set in. So, what caused the seismic shift in market thinking?
For more than a decade, the market fell in love with companies that promised high growth and innovation, namely tech, and that they rarely made money did not matter. Global central banks began a monster spree of money printing and rate cutting that made the stock market very attractive as an investment home. In time, valuations reached ludicrously elevated levels, but few people cared, as institutions and individuals were making too much money.
Overnight, the market fell out of favour, with overvalued companies hit hard, whether they were making profits or not. Initially, a small group of clever investors exited, but it took a while for others to cop on. Then supply chain issues and finally the Russian Invasion of Ukraine brought the horror of inflation home to all.
Many think this selloff is temporary, and that we are going to the same company stocks when the bottom sets in. This is a mistake: The stocks are still massively overvalued and have a lot further to fall, although some will recover.
Inflation became the main topic globally and has seriously affected all our lives. I come from an era when inflation hit 20% and interest rates were 15%. So, I get it.
However, many have little experience of inflation or high interest rates and are surprised when the European Central Bank started hiking interest rates.
You cannot fight inflation of 9% with interest rates that are at much lower levels, which means that rates are going to have to rise a good bit more.
Make no mistake that zero-rate policy by the ECB over the last number of years was nothing more than a tax on savers and did little for economic growth and in fact encouraged reckless corporate and government borrowing.
But the year has been so devastating for investors because all asset classes have depreciated at the same time.
In the past, with stocks getting hammered you could by gold and some bonds. This year we have the devil's cocktail of falling stocks and rising interest rates.
There is a lot of talk about the 60/40 portfolio and whether its long reign as an investing rule is over. The vast majority of investors are pension holders who are invested in some variant of the 60/40 portfolio. It is the staple template consisting of US stocks and western bonds.
The question is whether this strategy will suffice for the future. Investors are likely to continue to suffer for some time yet as interest rates continue to rise, and stocks continue to suffer. We expect a switch in mood later in 2023 when, hopefully, the interest rate-hiking cycle will be over.
Volatility will continue to be high next year as there are many global themes at play not least the risk of a serious recession. The good news is the Irish economy is well placed to withstand any of these headwinds.
For investors not tied to the 60/40 portfolio there are some opportunities in an inflationary environment, including in gold and silver. Other commodities and stocks that have little debt and pay a dividend should prove very popular.
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