February Newsletter: ‘The ‘R’ word is back’

24 February 2022


Markets are acting differently at the beginning of 2022. The loved stocks of recent years are falling. The Nasdaq Index, a benchmark for how US technology companies are doing, has fallen nearly 13% so far in 2022. What is going on?


What is going on is we are at a turning point, and turning points often change the past accepted trends upside down. For the stock market there are really only two long term trends.  Prices are going to trend upwards, or prices are going to trend downwards. Turning points occur when the central bank for the world, the US Federal Reserve changes direction. As it prepares to raise rates three times at least in 2022, its changing direction. Markets aren’t liking it.


The reason for the change is the unexpected recovery from Covid. Two years of printing money to stave off collapse and we have ‘full employment’. There are job vacancies everywhere. Who predicted that one? Bravo, the interventions from the governments worked. They just seem to have worked too well.


The consumer having been forced to save by cutting out holidays and working from home is flush. Splurging on a holiday this year or not minding about the price of a coffee means inflation has taken hold. We haven’t really spent anything for two years after all. Plus, following years of near zero inflation, inflation will go back to ‘normal’ when all this COVID stuff is over. Won’t it?


But there’s a problem. Covid has proved to many, life is too short for work. Early retirement is fuelling a shortage of labour and not just in Brexit Britain. That shortage is driving up wages. Inflation, first seen as passing by the central banks, is now more of a concern. Wage inflation is taking hold and central banks are going to be forced to increase interest rates further than expected. The past suggests that to stop inflation now, people will have to be put out of work. That tends to lead to a recession. A recession looks likely in 2023 if not before.


For the stock market then, the long-term trend is changing. We’re heading for a bear market if it has not already started. But no need to throw all caution to the wind and spend your money while you have it. We just have to be careful. Possibly like never before there are places to hide. Places even to prosper. The bull market we have seen has been concentrated in a few sectors such as technology. The Nasdaq may be up 1000% since the lows of 2009, yet the FTSE100 rise is not much over 100% in comparison.


So just as UK investors abandon their own stock market like never before for the siren call of the Tesla’s, Meta’s (Facebook) and Pelotons of this world, the companies for 2022 are likely to be the stodgier UK companies the investment markets have forgotten about. We are at the turning point.