I really like the above graphic as not only does it normalise the fall in markets that we’re experiencing, but it highlights the relentless growth of stock markets.

Can I draw your attention to the green number on the right-hand side. This shows the value of the S&P Index – the main US equity index – at the bottom of each decline. Each time a bottom is hit is another chance for the market to rise up again and increase in value. And it continues to happen, over and over again.

Another similar chart, albeit with a UK focus is the one below.

This grey bar shows the end-of-year returns for the FTSE All-Share, but the red dot and number show the scale of the largest intra-year decline from peak to trough. There are 8 years out of 36 where the intra-year decline has been greater than 20%, so just under 1 in 4. And many more at 17%, 18% or 19%.

Perhaps a reason as to why this feels so bad and different now, is when you look at the chart from 2012 onwards, the red dots are relatively well-behaved with the exception of Covid in 2020. Post-2009 was a great period of growth for global markets with only one very large sell-off. I’m not sure about you, but my memory from investing pre-2008 is quite hazy! Plus the sums I was investing back then are a little less than what I am investing now. I’m sure it is similar for most investors today, hence our ‘investing memories’ tend to be quite short-term.

So how long does it last?

Ah, I wish I had the answer. There are a couple more graphics that can help with this.

I like this graphic because it emphasises a point I try to make regularly. The economy is not the stock market and the stock market is not the economy. They are two different, but related beasts.

Looking at the above chart, my guess is we are somewhere around Middle Bear. The stock market cycle has certainly come down and we are just starting to see economic indicators turn lower as inflation begins to have an impact on the economy.

Does that mean the market will continue to fall? Maybe it does, maybe it doesn’t – I wish I knew. But this graphic also lends credence to something I’ve been saying to some of you over the last few weeks.

“The worse the economy looks, then the closer we are to the market hitting a bottom.”

The rationality around this is remember the US Central Bank officially (and most other global Central Banks also have, but its not necessarily official) has a dual mandate – inflation and economic growth/ employment. At the moment, given unemployment figures remain very low globally, the focus is 100% on putting out the inflation fire – hence further significant interest rate rises are expected.

If, however, global growth slows more and there are increasing signs of softening, then the focus moves a little away from inflation to perhaps supporting economic growth. This reduces the speed and fervour of interest rate rises which should in turn help markets recover.

So paradoxically bad news becomes good news… Welcome to modern financial markets.

The other graphic that you may find helpful is this one:

There is not meant to be a true representation of anything apart from an experienced investor’s view of how a typical bear market works.

As is normal with something that is ‘typical’, it will be specifically incorrect but generally helpful. My only criticism of this chart is the ‘Recognition’ part seems very early. Recognising a normal drop of 10% versus going further into a bear market is much easier to do in hindsight than it is today.

So where are we on this chart? We could be at 6, or we could be at 8, depending which index/ stock you’re looking at.

This is where you earn the returns

Bear markets are a brutal yet necessary part of investing. Without the risk of downsides, there would be no upside. Case in point, cash has no risk of downside and therefore at present, has no upside. Especially when compared to inflation.

Investing is a long-term exercise. You all know this but it is sometimes helpful to be reminded. You got through March/ April 2020 and you can now get through this. Sticking it out, stick with the plan and it will come right.

I realise all of these are seemingly empty phrases that don’t change the figures on the screen that are showing negatives, but they all are important and they all are true. Riding through these storms is crucial for long-term investing success.

If you would like to talk through your portfolio and have any questions, please feel free to reach out as I’m here to help.

Adam Walkom

Permanent Wealth Partners

Phone 020 3928 0950

Email adam@permanentwealth.co.uk

LinkedIn www.linkedin.com/in/adamgwalkom