I wanted to reach out because we have yet again seen geopolitical headlines impact global markets. The fear of WWIII is across the airwaves and every commentator and citizen is trying to guess Putin’s next move. In short, we just don’t know.

Markets have been falling for most of 2022 with the reason being inflation and potential interest rate rises. It hasn’t been much fun, as falling markets never are, but it has been relatively orderly with no real big blow-out selling days.

Until today.

So to take stock, I want to look at the market structure elements but then also remind ourselves of the psychology as well.

For the market structure, let’s look at my favourite catalysts that drive markets: liquidity and positioning.

Liquidity

This is all about Central Banks who are now effectively removing money and liquidity from the financial system and pushing interest rates up. This creates a big headwind for markets in terms of there are forced sellers in the markets, both bonds and equities, and with further rate rises expected this looks like all bad news. Or does it?

This is potentially interesting because what the Ukraine situation does is give the US Central Bank a chance to temper their language on interest rates rises. Less aggressive rate rise expectations = less liquidity being withdrawn from the system = less pressure on markets.

This is something to watch out for as a potential green light for markets to recover.

I am watching and waiting on this.

Positioning

Markets have been rotating out of growth stocks for the last 6-8 months and some of the smaller stocks are back to their pre-Covid valuations. This eventually will stop, and the catalyst may well be less aggressive interest rate rises.

There are times when the value names (ie lower growth, dividend-paying, sometimes older companies) outperform and we are in that period at the moment. Will a rise in bond yields push people back into bonds at the expense of equities? My guess is not before they hit 2.5% or something that actually makes it worthwhile.

So there is potentially good news out there. I can’t tell you when, but all I can say is that this will be over at some point.

Finally, I want to include a section of text that I wrote in March 2020 during the severe Covid sell-off. It is still just as relevant today as it was then because it’s about human emotions and psychology. I apologise for re-hashing old notes, but it encapsulates exactly the thoughts I continue to want to express to you today. The underlying news changes, but the human aspect doesn’t.

From 9th March 2020

Nobody knows the impact on the economy. Will people stop spending? How disrupted are supply chains? Again, there is no answer at the moment and we won’t find out for at least a few weeks.

So the fear is real. If you look at your portfolios and see them down and worry about it, that’s ok. That’s normal. This virus is scary. I have three young children and older parents. I’m worried. It’s a normal human reaction.

However, whilst normal and biologically necessary, fear is not very helpful for us as investors. Fear raises the adrenaline level in us and prompts us to take action. It’s how we survive as a species when the sabre tooth tiger walked around the corner of the cave. However, this “taking action” is the last thing we should be doing with our long-term plans. For clients who call in for a chat (by the way, if you are worried please feel free to call), I’ll ask you – has your long-term financial plan changed in the last two weeks? No? Then we shouldn’t change your long-term portfolio.

Fear wants us to take action, to fix things. To take short-term action on a long-term portfolio is a dangerous game. It’s totally normal to want to say, “I’ll just get out and sit out whilst everything recovers, then when the markets feel better we can get back in”. That’s fear prompting that.

The problem is nobody tells you when this recovery is – and they certainly don’t tell me. Think about it. The market felt a lot better three weeks ago – just before this large drop. But nobody held up a sign, nobody ‘really knew’ because nobody ever can.

Market volatility like this is what drives the long-term returns. By moving investments from short-term sellers to long-term buyers. And you are the long-term buyers. The plans we put together stay in place. I understand fear may cause you to want to act in a short-term basis but please don’t. It’s potentially the difference between achieving your goals and not.

This is why I’m here. This is why I help. This is why you’ve taken on a financial adviser/planner – to help guide you through tough times like this and remind you about the plan – and that’s what I will do.

Stay well,

Adam.

Adam Walkom

Permanent Wealth Partners

Phone 020 3928 0950

Email adam@permanentwealth.co.uk

LinkedIn www.linkedin.com/in/adamgwalkom