Are We Nearing the End of the Bear Market?

There were glimmers of light in the UK stock market last week. I actually purchased a few shares to add to my current holdings although I still have a lot of cash in my portfolios. It is worth repeating what Mark Slater of Slater Investments Ltd said at the end of the week:

“The bear market that started in late 2021 is now getting fairly long in the tooth. It has led to significant de-ratings across the board, with a small number of exceptions among the megacaps that dominate the FTSE 100 index. We have now seen a run on a major bank. Many investors are trying to work out which is the next shoe to drop – perhaps a real estate collapse, perhaps a worse recession than expected. We are well and truly into the disillusionment phase. Sir John Templeton said that “bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” Conversely, bear markets kill off the euphoria of the previous phase quite quickly and then grind away at any residual optimism until almost all market participants are deeply pessimistic. Given the current mood, the odds are that this bear market is nearing its end.

We are not advocates of market timing for the simple reason that it is extremely hard to get it right, both at the point of entry and exit. Investors who can do this are extremely rare, and most of them get it badly wrong at some point. Instead, we prefer to buy businesses we understand that can compound their earnings over time. We expect the majority of the companies we own to do this even though the economic backcloth is challenging. Some other companies we own will probably see their growth rates slow temporarily but we expect them to improve their competitive positions during tough times by taking market share or by making cheaper acquisitions. Only a handful of companies in the portfolio have experienced problems but these are typically due to unforced errors or things like China’s lockdown, issues that are temporary or fixable.

We have not seen so many companies we own trade on single digit PE multiples since 2008-9. Now, as then, as companies grow their earnings while their multiples fall they are getting cheaper and cheaper. It is analogous to holding a beach ball under water. Sooner or later you cannot hold it down any longer and it jumps above the water. For a more accurate analogy, someone would also be pumping air into the beach ball while you try to keep in down.

It is fashionable to be “down” on the UK, especially after the Truss budget. It is therefore worth remembering that the UK is not all doom and gloom. The Mid 250 index has broadly matched the earnings of the S&P 500 over the past twenty years. The UK market also produces a higher proportion of “tenbaggers” than the US market. Michael Caine might say that “not a lot of people know that” and he would be right. Our view is that we saw peak gloom about the UK last autumn.

While we cannot predict the end of the bear market with any accuracy we also believe we should not try to do so. We are comforted that we own good businesses that are cheaper than they have been for a very long time. If we look ahead a couple of years rather than a couple of months, we expect to make money When things are going wonderfully, people can rarely imagine that they can go wrong. Similarly, when times are tough, people often struggle to imagine that they will one day be wonderful again.”

These are wise words from a very experienced stock market investor.

Roger Lawson (Twitter: )

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Are We in a Bear Market?

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:  )

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