WeeklyWatch – Recession fears grow as shares struggle worldwide

5 July 2022

Stock Take

Energy and healthcare rise, tech plummets

US markets reported their worst half yearly performance since 1970 as the second quarter of 2022 came to a close. Meanwhile, investors continue to face a challenging environment due to rising inflation, higher interest rates, and Russia’s invasion of Ukraine.

Over the first six months of the year, the S&P 500 fell almost 20%, while the tech-heavy NASDAQ plummeted 29%.

Few sectors performed well in such unpredictable circumstances, with consumer and technology businesses generally struggling the most. However, at the other end of the spectrum, energy, financials and healthcare were the top performers.

This has some similarity to the 1970s – which saw markets fall as inflation reached similar highs – noted Tony DeSpirito from BlackRock. He continued:

“While the backdrop is different today, we do believe these three sectors could outpace the broader market once again, with financials potentially doing even better in this cycle, given stronger bank balance sheets after restructuring and rigorous stress testing in the wake of the Great Financial Crisis.”

US and European shares fall

Early gains made room for larger falls last week, as the final revision of US Q1 2022 GDP data was downgraded due to weaker consumer activity. Overall, the S&P 500 ended the week at -2.2%.

European shares also struggled, as headline CPI inflation in the Eurozone reached a record 8.6% – far above any predictions. In total, the MSCI Europe ex. UK fell 1.26% over the week, while the German DAX Index and French CAC 40 both fell over 2%.

Expectations around interest rates are that the European Central Bank will start increasing rates in the future, while the continent continues to grapple with its dependence on Russian energy fuel.

Meanwhile, the FTSE 100 fell 0.6% – meaning that overall, the index was down 2.9% for the first six months of the year. This is a considerable outperformance compared to its US peers, partly thanks to the sector mix of the FTSE 100, and despite a notable fall in June, investors continue to stipulate the increasing likelihood of a recession.

Markets begin to slow

Recession fears have made waves in recent weeks, as a number of economic indicators have suggested Western markets are slowing down. This is thanks, in part, to reduced consumer spending and the rising cost of living.

Kristina Hooper, Chief Global Market Strategist at Invesco, is not alone when she suggests:

“While pandemic-driven factors continue to complicate cycle analysis, we nevertheless see higher inflation and slowing growth, indicating that we may be late in the business cycle. The remainder of 2022 is likely to bring a substantial slowdown in growth for major developed economies.”

Alex Tedder, Head of Global and US Equities at Schroders, added:

“Whether the ultimate outcome is recession or stagflation, the implications for corporate earnings are clearly negative. Margins are likely to experience pressure over the coming months as cost pressures become apparent and top-line revenue growth begins to slow.”

Looking to the future

While the past six months haven’t been the smoothest ride – and there’s likely trouble ahead – it remains important to consider the long term when looking to the future.

Market volatility has the potential to create buying opportunities for active fund managers. In their role, they will have thoroughly researched companies and analysed their long-term earnings potential, which will give them a good idea of what a company is worth, and how much they want to pay for shares.

With prices falling, more and more companies will be low-balling their trading prices, giving them the opportunity to buy. And while this might result in some short-term falls, it gives them the opportunity to buy future profits at discounted prices, with the opportunity to make even better long-term returns.

While the short-term falls naturally can feel uncomfortable, remaining invested is the best option.

As Darren Johnson, Senior Investment Consultant at St. James’s Place, points out:

“If you’d said in the summer of 2012, ‘I know exactly what’s going to be happening. The Eurozone crisis will go on for years. Brexit will happen. China will have a hard or soft landing depending on what you how you interpret it. We’ll have the biggest global pandemic in a century, the steepest economic decline in history, war in Europe, yet markets have grown substantially over this period,’ most people would have thought you were mad. And yet, markets have done that despite these events – not because of, but despite of – these events.”

He adds:

“The biggest probability of success is to remain invested. The biggest guarantee of failure right now would be to put your money in cash where inflation – which is currently hovering at 9.1% – will erode the value of your money away.”

Wealth Check

‘Short-termism’ is something that’s hardwired into our DNA – we can be guilty of often thinking short-term, in all areas of our lives. That’s arguably – and understandably – truer now more than ever as we focus on financial well-being. In such fragile times with high inflation and market volatility, it’s hard not to consider immediate needs when working towards our long-term goals seems like a future-you issue.

To avoid the temptations of short-term gains, we need to find a way to work past our fears and overcome our biases, especially in the context of our investment strategies. Such a short-sighted approach to wealth creation will rarely provide the best results.

Andrew Shaw, Strategy & Communication Director at St. James’s Place, says:

“The last thing you want to do is cash in your investments when prices have fallen, and then try to buy back in after they’ve bounced back up. When we suffer these market shocks, we first need to take a step back and consider whether we’re speculators or investors.”

History has shown that market falls are a given when investing, and that volatility is natural and to be expected from time to time. While these short falls can happen relatively frequently, looking over the long term, however, markets tend to rise.

So, rather than focusing on short-term fluctuations, it’s more important to compare returns with your current set of carefully considered objectives. Knowing that there will always be times when markets are more volatile will help you best prepare for your future, as will thinking in decades, not days, with a goal or plan to guide you, and avoiding changing a long-term strategy because of a short-term adjustment.

Shaw points out:

“It’s time in the market, not timing the market, that’s key. Using an adviser as a sounding board can help us renew our financial choices – and prevent us from making poor ones – by bringing us back to our core priorities. They’ll remind us of the most crucial questions: what do we want to do with our money, and have our objectives or timescales for achieving those goals changed?”

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“There’s no pressure. Like, why is there any pressure? I’m still 19. Like, it’s a joke. I literally won a Slam.”

– Women’s Tennis player, Emma Raducanu reminds viewers she is still at the start of her career, after being eliminated from Wimbledon last week.

BlackRock, Invesco and Schroders are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2022. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2022; all rights reserved.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.