There are a number of ways of defining a bear market. One is that it describes a condition in which securities prices fall by 20% or more from recent highs amid widespread pessimism and negative investor sentiment. In my stock market portfolio we have not quite reached that level and the FTSE All-Share index has certainly not declined that much mainly because it’s full of big oil and mining companies where commodity prices have been rising. But I certainly have a feeling that many investors who have been pulled into technology stocks or small cap companies in the last couple of years have been running for the hills.
The economic and political news is bad with rising inflation and rising taxes, and potentially a war in Ukraine. Any sanctions against Russia will have negative economic consequences both for us and Russia.
It is this combination of factors that are likely to create the conditions for a declining stock market particularly if liquidity is taken out of the market by rising interest rates.
One hates to predict where the market is headed as unpredictable events can have as much influence as human emotions, but trends are certainly worth following. As a result I had been moving more into cash over the past few months and if I have bought any shares it’s in high-yielding stocks and short duration bond funds. Holding cash is of course a good hedge against stock market volatility or declines, but there is a limit as to how much cash you should hold in a portfolio and for how long. Most very successful investors seem to remain fairly fully invested and with inflation rising it would be a mistake to be holding too much cash whose value is eroded by inflation.
I am not yet convinced that it is time to move back into more speculative stocks in a big way – they still don’t seem cheap enough to me. But here’s a good tip from Chris Dillow in last week’s Investor’s Chronicle: “In the long run, there is no correlation across countries between growth and returns”. In other words, don’t bet on making money by investing in apparently high-growth economies or sectors. He says “in the past 10 years, for example, China’s fast-growing economy has delivered worse returns for equity investors than the slow-growing economies of many European countries such as France, Switzerland or the Netherlands”.
That is one lesson I learned many years ago. It’s a simplistic approach to investment to back the obvious growth economies but it simply does not work.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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