Harold Macmillan, Prime Minister of the United Kingdom between 1957 and 1963, was once asked to identify the greatest challenge to his administration, to which he reputedly replied: “Events, dear boy, events”. It is a sentiment still relevant today as the recently ousted Prime Minister, Boris Johnson, can attest.
This quotation also has relevance for investing. What is the greatest threat to a successful outcome when investing? Events, dear boy, events! This is not only as events create challenges to work through, but they also encourage behaviours that are not compatible with successful investing. As Bill Miller, the famous US investor, once said, it is time in the market, not timing of the market, which determines an investor’s outcome. Events have the habit of creating the illusion of market timing opportunities, which are often as unpredictable as the events themselves, and encourage activity when it is often better to wait.
In the last 14 years we have had three events, or crises. Each has shaped markets in their own unique way, but they have something important in common: they have been universally important, impacting areas of our lives we cannot avoid. The first was the Great Financial Crisis (GFC) of 2008, which was a crisis of finance and therefore money. Covid in 2020 was a health crisis, and the invasion of Ukraine has created an energy crisis. Taken together they have impacted the three most important elements of our lives: money, health, and energy.
Many people lived some of these events on a personal level, through queueing at banks worried about the safety of their money, joining lines to be vaccinated against the pandemic, and sadly in the near future making tough decisions about how to make ends meet as energy and food prices move higher. It is no surprise that each of them had (or is still having) a major impact on investment markets.
The GFC heralded the start of a new era in investing. For more than a decade, up until 2020, we lived in a world of low interest rates, needed as the economy healed after the GFC, and good economic growth as areas such as technology and shale oil (which kept energy prices low for decade) boosted corporate profits. Low interest rates and growing corporate profits is a favourable backdrop for investing. After the Standard and Poor’s 500 (S&P 500), the US equity index, bottomed at an intraday low of 666 in 2008, it progressed rapidly to multiples of that in years to come and was around 3200 just before the pandemic hit (source: Bloomberg). This illustrates the power of long-term equity investing, and that time in the market is more important than timing of the market.
As the pandemic hit in 2020, the initial reaction of markets was to sell off heavily. This sell-off didn’t last long however as governments and central banks took decisive action to support the global economy, which itself underwent a remarkable transformation. The pre-existing path to digitisation was accelerated by remote working, while new healthcare innovations such as mRNA, the basis for many vaccines, were brought to market in record time. It was a time of acceleration of previous trends, and not a change in markets, which took the S&P 500 up to new highs of above 4800 by the end of 2021. From 666 to 4800 in 13 years, a return of over 700% for those who remained invested.
In early 2022 an energy crisis hit us as Russia attacked Ukraine. We have written before about the importance of Russia in key markets such as oil and gas, and this, combined with strong economies globally has sent the price of these commodities rocketing higher. This crisis has, for now, broken the rhythm of markets in the 13 years leading up to it. This is not a crisis which is accelerating the transition to a better future; it is a regressive crisis that requires tools of the past, such as armaments and coal, to resolve. It is also a crisis that requires higher interest rates and lower standards of living as it is inflationary. In this context the falls for markets, both equity and debt, is perhaps not surprising. Recently the S&P 500 fell to 3666, reflecting a material decline from its highs above 4800 at the end of 2021.
It will take some time to understand the long-term implications of the energy crisis, much as it did with the GFC. After the GFC, there were many theories about how investment markets would evolve; some were right, and some were wrong. In hindsight this was a point where value investing stopped working as it was impaired by disruption from technology and didn’t benefit from lower interest rates in the same way that growth investing did. The 2000s was a time of reversion to the mean and value investing while the 2010s was a time of growth investing. The pandemic acted as an accelerant on the 2010s and for nearly two years supercharged that trend. What will happen next?
We have something of a philosophical belief, grounded in an ever-growing number of years of having lived, that society and economies move forward, not backwards. It is our inclination therefore that our dependence on armaments and carbon (oil, gas and coal) is a punctuation of the trend away from them, not the beginning of a trend towards them. When it will end is hard to predict, as was the end of the GFC and the pandemic; but when it does, we expect previous trends to re-establish themselves and the world to continue its journey to becoming cleaner, healthier, safer and more inclusive – which is the backbone of sustainable investing.
Investment markets did have a slightly better time over the summer months, and at one point the Nasdaq enter bull market territory (as measured by a more than 20% increase in value). This was catalysed by the Chairman of the US Federal Reserve hinting that interest rates increases in the US may be coming to an end. More recently, however, the narrative from the Chairman has been that interest rates will have to remain high for some time to bring inflation back under control, and that has seen some of those recent gains being lost.
These movements illustrate what will drive markets in the coming months: inflation. If inflation begins to fall, as we believe it will as the economy slows down, then it could result in a more favourable environment for investors. Should this not occur, perhaps due to further rises in energy and labour costs, it will remain difficult for markets to make progress.
Despite all this, and as someone who managed money following the technology bust of 1999, the terrorist attacks of 2001, the GFC, the pandemic and now during the energy crisis, this too shall pass. We remain invested in high quality, socially and environmentally relevant businesses that, in recent months, have continued to perform operationally largely as we expected. We believe that once we pass through this crisis, as we surely will, a more optimistic future than the one we are faced with currently will appear to the benefit of all.
Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.