So we finally got the correction we had been expecting. But, judging from some of the wailing and gnashing of teeth in the media, there were still some to whom it came as a surprise that markets can go down as well as up.
We have written at length in recent weeks about the reasons for being wary and these were, pretty much, the triggers for the recent turmoil. Growing inflationary pressures in the US led to fears of higher prices and the risk of the Federal Reserve raising interest rates faster than expected. With equity valuations high and volatility not only low, but many investors actually betting it would go lower, the warning signs really were there.
Anyway, that is now in the past. What matters is where do things go from here? Well, we expect the short term to remain bumpy – possibly very bumpy. The definition of a correction is 10% off from the recent high and of a bear market, 20% off from the year high. So, whilst we are not in bear market territory, we need to recognise for every short term bounce there could be an equal and opposite slide back. Could we see lows of 15%? Quite possibly so, if we do, what should we do?
We stand by our view that the next bear market will be triggered by an expectation of the end of the business cycle. We may now be late cycle, and the end may now be sooner than many had expected, but we don’t think it is imminent. So, with the global economy broadly strong, and many companies delivering robust earnings, we think this is a buying opportunity.
These periods of correction and uncertainty are not pleasant but they should not be seen as unusual. What was unusual was that it took so long to happen. We have an opportunity to buy equities cheaper than they were before. But be prudent. Buy good companies with solid balance sheets and generating decent cash flow. Remember, this is late cycle so protecting wealth matters. Don’t squeeze the pips out with what is left of the juice.
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