Stocks had a tough April. $SPX500 dropped 8.8% and the technology index $NSDQ100 13.6%, the latter posting its worst monthly performance since October 2008.
Because we do not hold Technology stocks, our month was better, at -3.9%. Since the beginning of the year, our portfolio has outperformed the index ($SWDA.L) by 11 percentage points.
Looking forward, we expect a significant slowdown in the global economy and a manufacturing recession. However, the overall economy should continue to grow thanks to strength in the services sector.
A recession is more likely in 2023. The Federal Reserve will want to avoid pushing the US economy into recession this year if it can. However, inflation pressures have become so entrenched that sooner or later policy will have to be taken to a restrictive level. And “[t]he historical record tells us the Fed has never been able to correct even noticeably smaller overshoots of its inflation and employment objectives without pushing the economy into a significant recession,” notes Deutsche Bank.
Because of the poor state of the economy and the ongoing tightening campaign by the Fed, we expect a tepid year for stocks in 2022. Lacklustre action will probably continue into 2023, due to the inflation problem.
The temptation in this situation is to “sell stocks, hold large sums of cash, and wait for a market crash to buy back in.”
There are two problems with this strategy:
1. Cash yields nothing, leaving investors with a guaranteed loss after inflation.
2. Experience has shown that many do not, in fact, buy back after the crash, preferring instead to wait until the situation has improved, by which time it is too late to buy back in.
We also know that timing the markets is very difficult. Smart people often come to opposite conclusions about what will happen next. Right now, for example, Goldman Sachs is saying that the sell-off has been overdone,
while Bank of America thinks that more downside is coming as the new investors who entered the market in the last 2 years become scared and exit.
We do not know which view is correct. What we do know is that the economy is slowing and there is the very real risk of recession, which is not yet in the price ($SPX500 falls 32% on average in recessions). We thus prefer to keep risk-taking at a moderate level. But we are also not going to sell everything and go to cash. We strongly believe that outperforming the index will lead to a good result in the long run even if there are negative years along the way.