CRAIG PHEIFFER: This time the crisis is different … but it’s not
Sir John Templeton famously suggested that the four most expensive words in the English language were “this time is different”. While these paraphrased words have a uniform application, they were aimed at investors who thought the behaviour or value of markets somehow changes after a dramatic market event or new investment fad. In essence, he was saying the market has seen it all before.
While some market developments may seem new and unexplained, they’re probably the same or similar to something previously experienced. Some might say that with the multiple crises the market is facing, this time really is different, perhaps because we haven’t experienced a confluence of this particular set of crises before.
Still, the world has experienced many instances of wars, pandemics, energy shortages, inflation, rapidly tightening monetary policy, deglobalisation, trade wars and overzealous government regulation. Despite this history, markets are broadly higher than they were 100 years ago, 50 years ago, 25 years ago and even 10 years ago.
The Covid-19 pandemic, which is still disrupting economies around the world, may be a newer and mutating virus, but the world and the markets have lived through pandemics before. The severity of each one has differed, but the Covid-19 pandemic is following a similar path to the Asian flu, Aids, Spanish flu and Hong Kong flu pandemics (among others).
The current energy price surge has elements of both strong demand and weak supply, but many will recall the energy crises of the 1970s, with the first in 1973 driven by the oil embargo that followed the Yom Kippur war, and the second in 1979 after the Iranian Revolution. The associated bear market in the US over 1973-1974 saw the S&P 500 lose 47% from its peak in 1973 to its September 1974 trough just below 65 index points. Today the S&P 500 trades close to 4,000 points after its record high of 4,793 in the first week of 2022.
We’ve witnessed several bouts of quantitative easing and subsequent tapering, but what may be different this time around is quantitative tightening.
Rampant inflation is not a new phenomenon for markets or economies either. The current heady US inflation rate of over 8% is a function of both increased demand and global market shortages (energy shortages and various supply chain components). The US central bank has substantially underestimated the magnitude and duration of this inflation cycle and consequently must play catch-up with monetary policy tightening.
However, the record books show previous periods of rapid rate hikes and times of soaring inflation in the US (12.2% in November 1974 and 14.6% in March 1980). We’ve witnessed several bouts of quantitative easing and subsequent tapering, but what may be different this time around is quantitative tightening (reducing the size of the Federal Reserve’s balance sheet).
Despite the Fed’s knee-jerk reaction and hawkish positioning, the fixed-interest and equity markets are digesting the next interest rate paradigm. Market volatility remains elevated as uncertainty prevails. While the Fed is poised to continue beating down inflation with its interest rate stick, the peak or longer-term target of the federal funds rate is likely to be within grasp over the next year.
The Covid-19 lockdown did accelerate the growth of many industries, and the “work-from-home” phenomenon boosted demand for hardware, software and cybersecurity for the home office. Home deliveries and online shopping accelerated as we hunkered down in the suburbs, and while that demand boosted corporate earnings, it also boosted market expectations and valuations.
The easy monetary policy around the world and associated flood of liquidity also helped drive up stock market valuations. With monetary policy being tightened and liquidity withdrawn, stocks are derating and could still derate further as earnings growth slows. But that is the cycle of markets, and the purge often follows the binge.
The dot-com bubble bursting in 2000 saw the market lose 28% in three months, but it had fully recovered a year later. The Enron/accounting scandal knocked the market 37% in just less than a year over 2002/2003, but a year later it had recovered about 90% of those losses. The global financial crisis and great recession saw the market value almost halve in six months, and the recovery did take a good three-and-a-half years as the world worked through the implications of the sub-prime crisis and the collapse of Lehman Bros.
More recently, the Covid-19 lockdowns sliced 35% off the JSE in the space of a month in 2020. It took 521 days to regain those losses, but the market then went on to record numerous record highs. History is filled with other significant market crash stories that include Black Monday in 1987 (when the Dow fell 22.6% in a day) and the Wall Street crash of 1929 (the original Black Monday and Black Tuesday).
In short, markets have endured numerous crises and stock market indices have ebbed and flowed through various economic and interest rate cycles. Market volatility has also risen and fallen over time and buffeted investors as market uncertainty has waxed and waned. That’s the nature of the equity market. Despite all the noise, equity markets have been shown to reward the patient investor who stays the course.
We can try and put a different spin on the various crises affecting the market right now, but in essence this time is not different. One can never be sure of the timing, but the market will digest the current weakness/bear market/pullback/correction, or whatever other name you’d like to assign to the lower markets.
Warren Buffett told us to be greedy when others are fearful, but Templeton summed it up best: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
We may not yet be at the point of maximum pessimism, but the message is clear. Investors should hold their nerve, retain their investments in quality shares and supplement their portfolios with any special opportunities only weak markets can present. We will continue to follow that approach for all our discretionary managed client portfolios.
• Pheiffer is chief investment strategist at Sasfin Wealth.
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