2022 was, to say the least, quite a year for stock markets across the globe. I had long said that we were heading for a slowdown or correction as early as January 2020, based purely on the fact that economic and market conditions were easing after over 10 years of recovery and growth following the 2008 Financial Crisis.
We were starting to see signs that markets were stalling but no-one could have predicted the Covid 19 pandemic and its fallout on the world and that event was the start of the perfect storm brewing.
The pandemic gave rise to the stay-at-home tech boom and an exceptional increase in spending as people across the world spent much of their government stimulus funds in a manner not entirely in line with that planned by said governments!
As well on Amazon and other online retailers, a lot of the stimulus money was put to work on trading apps by younger investors, enticed by the promise of riches and easy trading. In the US companies like Robin Hood saw enormous growth in the number of younger users, as did many of the spread betting companies in the UK. This added a new but artificial dynamic to global market growth as much of it was done through derivative trading using options and CFD’s.
The excess retail spending accelerated inflation, leading us to arrive at the beginning of 2022 with the arch nemesis of economic and financial markets – the dynamic duo of rising inflation and rising interest rates – fully in place.
So at the beginning of last year we were already in trouble, many of the stay at home stocks were starting to falter because the consumption could not continue and the threat of rising interest rates failing to control inflation enough to prevent a hard recession caused much concern in the markets – if we were all going to be spending more on our bills and mortgages then we would naturally consume less, leading to lower profits for companies out there, leading to redundancies and the whole thing getting worse, many feared, plunging us back to the 1970s!
So when Russia invaded Ukraine and sparked an energy crisis, all the pieces of the perfect storm jigsaw fell in to place and markets reacted badly.
2022 was a year when markets across the globe fell hard not because of one single event but because of the accumulation of several significant events, which all fell in to place so quickly and elegantly.
It’s different this time
For what seems like forever, economists and market analysts have relied on the phrase “its different this time”. Which of course is always correct to a certain degree, every market crash or correction has different root causes, sometimes like previous ones sometimes very different, but always different. But there is a constant in the mix – cycles – and the excellent work by Kerry Balenthiran on the 17.2 year Stock Market cycle has outlined the route of market behaviour throughout the last few years almost perfectly.
But while we are currently seeing almost all the classic economic and market behaviour expected at the moment, there is one thing glaringly different that gets all economists and market commentators hot under the collar – unemployment.
By now we would expect to see unemployment rising as all other cyclical events fit in to place, but it is remaining stubbornly low across the UK and US and in the US in particular, this is why many commentators refuse to believe the US economy will go in to a recession.
Both the pandemic and Brexit in the UK caused a drain on the availability of new employees in many sectors, and it is not getting any better.
While the job market remains so buoyant in many areas it could be difficult for the economy to go into a full-blown recession. Now, I hear you cry, the Tech sector has been badly hit with redundancies, take Amazon for example, who only last week announced 1200 redundancies in Scotland. But, I counter, they also announced the creation of 2500 new jobs at warehouse projects in England this same week.
So yet again, it is different this time but how is that going to affect the investor?
While unemployment remains stubbornly low, it is difficult to see anything other than a soft landing into a mild recession in the US and UK. Once the effects of the pandemic settle further and China opens again and travel, both business and private returns to its former glory, we could see a rapid resurgence towards economic and market growth.
I think 2023 still could be a difficult volatile year as these factors play out but I do believe that the UK market has bottomed for now and could be in the early stages of a bull run for some of this year, setting up the next long term growth cycle from 2024 onwards..
The US seems a little different, I feel there is one more unwinding in their main markets before the new bull cycle gets underway. So, this makes the US potentially a more dangerous and volatile place to be an investor at the moment.
In any case it is certainly time to start thinking about positioning your portfolio or new investments to make the most of the recovery and next cycle.
2023 looks to be an exciting year and one we will look back on as a great opportunity before a resurgence of the Bull in 2024.
Are we there yet? Nearly!