The quarter to end September has been a rollercoaster ride in a turbulent year. We saw markets ending at new lows for 2022, with the S&P 500 down 23.9% year-to-date, the MSCI World down 25.1% and the ALSI down 10.1% in rand terms and 21.6% in dollars. Let’s take a closer look at how the quarter unfolded and what might come next.
Following a weak June, markets recovered in July and had bounced 17.7% by mid-August from their June lows —only to surrender their gains after the Fed indicated that interest rates would remain higher and for longer than anticipated. The S&P 500 and MSCI World respectively closed September down 8.2% and 8.3% from their August closes and lost 4.9% and 6.1% for the calendar quarter.
South Africa’s markets did not fare much better. The JSE’s ALSI had gained 10.6% from the middle of July to 16 August before coming under pressure. In rand terms, the Index fell 9.3% from its August high to the end of September and declined 1.9% for the quarter. In US dollars, the ALSI was down 12.6% for the quarter, with the bulk of this being attributed to rand weakness at 11.5%.
It’s natural for investors to feel disheartened when there is so much bad news from the markets and for them to question if further losses are in store. However, from our decades-long experience in managing money, we know that no crisis lasts forever. In our newsletter last Friday we referenced Coronation’s CIO, Karl Leinberger who noted that that markets are forward-looking and that they rally when we least expect them to, often ahead of news flow.
Dead cat bounce or markets roaring back?
In his words: “Once markets start rallying, it never looks like it is sustainable. Again, investors attribute it to a dead cat bounce, a bear market rally or assume more bad news is coming.” But when they roar back, markets add gains very quickly and overly cautious investors risk losing out on the upside. Leinberger highlights two examples:
This argument also holds up when we look further back. The table below shows every major drawdown on the S&P 500 between the Great Depression and the Global Financial Crisis. On average, markets recovered in under two years. As we can see, market crises provide opportunities for patient, disciplined investors to buy assets cheaply and benefit from outsized gains in subsequent years.
Merrill Lynch also offers some sage advice for these volatile times: “Sometimes the most difficult thing to do in investing is to look past the present and plan for the future. That is especially true given today’s tumultuous investment environment.” As they continue to argue, great resets offer great opportunities for investors that don’t get caught up in the short-term ebb and flow of the market.
As such, we believe investors should not fret about whether we are at or near the bottom of the current stock market rout, whether the Federal Reserve will be hiking rates by 75 or 25 basis points, or whether we are experiencing a growth scare or heading for a normal recession. It’s more important to navigate uncertainty with a disciplined, long-term approach.
Timing the markets is not an optimal strategy
In our newsletters and updates, we often stress that timing the markets is historically an unsuccessful strategy. We cannot second-guess day-to-day or even quarter-to-quarter market movements in an uncertain world. The current investment environment is shrouded in unknowns as the world struggles to contain elevated inflationary pressures, the aftershocks of the pandemic and the military conflict in Ukraine.
But when we take a wider, longer perspective, market returns will almost always be prone to periodic bouts of volatility. Furthermore, returns are never linear by nature. For stocks, time is the best recipe for loss avoidance. This is aptly summed up by BofA Global Research, that the probability of losing money over one day is a little less than a coin-flip (46%), but the probability declines to just 6% when analysed over a 10-year window since 1929!
As we can see from the graph above, 10 year-long periods of negative returns are rare, with the serial crises of the 2000s producing the only decade outside of the 1930s with negative total returns. History indicates that the calm and the patient will be rewarded with above-inflation returns if they take the long term view!