This is a good example of the way that the stock market moves in anticipation of weaker earnings in the future. This is just showing you UK, homebuilders basically. You can take any UK home building stock as of January last year, just graph it, and you will see that they have fallen by about 50%.
The interesting thing is that the property market has only started to fall. You can see that the property prices or property companies started to fall in January, whereas property buildings, your house, has only started to fall as of November. So, what's the disconnect there? Big time lag. Why is that? The stock market can move instantaneously. You get interest rate rises at the beginning of last year. The stock market then knows the profitability of my property company will be lower in the future because mortgages are going up, therefore less people will buy houses so I'm going to build less houses therefore, I'm going to make less profit.
Share price starts to fall straight away, whereas property prices, If I want to sell my property, it takes six months to sell my property and you're only starting to get transaction values now and so there's a delay in that.
The interesting piece is that you can see that back in say, September, you're getting a bottoming out in property prices. So actually, was that not the time to buy? How difficult will it be when you're having conversations with clients, to tell them that now's a great time to invest, when all they're hearing about is recession and the fact that their property prices falling, the value of their biggest asset is going down in value and you're telling me to invest? The point is, is that the stock market is always looking into the future, so the market has already anticipated a recession, and stocks have moved in anticipation of that. So, once you get the recession, that's usually a line in the sand and the market knows that the next move is up.
So, the market starts to price that in and look, what does the environment look in six months’ time after that recession? and those stocks start generating better returns. So that's why you can get the market moving in advance of the information. So, for me, I think, from a psychological perspective, it would be quite a challenging year for investors, but not stock markets, and that's quite interesting.
This graph here just shows you 60/40 portfolios, and we all know that last year, was an absolutely terrible year for 60/40 portfolios, because both bonds and equities sold off. The interesting point from this chart is that whenever you get a greater than 10% fall in the 60/40 portfolio, the next year is positive. This is looking at data, going back to 1980. It shows you key time periods when you saw those big falls and then it shows you what happens in the subsequent years.
If we look again, I've got the performance of the different asset classes last year. But what's happened in the first week or two of this year? We’ve talked about the fact that the China market sold off for two years in a row, that tends not to happen. The last time that happened was 60 years ago. That creates a great opportunity because the property market is now in a firmer footing.
They've had lockdown for three years; the economy is now re-opening and look at that stock market. It's already taken off this year because the government has come out and said, we're lifting restrictions, opening up the economy, people can come visit. That just means economic growth is going to pick up there.
So, think about what happens here. Post-Covid what happened to GDP growth? So, if you go back to that chart with the GDP growth, massive spike, the thing there they'll have to worry about is inflation. They haven't had inflation to the same level that we've had over here in the UK because they were in lockdown, but I also would argue because they build and make so many different things, inflation will be slightly different there, and they'll probably have less supply problems because they are the main supplier.
If we look at the UK, the UK is actually off to a good start as well. So, equities generally, European equity has a strong bounce coming through there, you're seeing a bounce in fixed income, so it's pretty much positive across the board. That feeds back through into this expecting better outcomes for 60/40 portfolios this year.
This chart is just talking about the whole concept around bear on bull markets. We all know that bear markets are a fact of life. They happen, but, when they do happen, they tend to, on average, last for a short period of time. So, on average, this is looking at data, going back to 1950. The average bear market is 13 months, the average fall is 34%, but you should be focused on the bull market because, anytime you have a bear market, the bull market that follows is always stronger and longer.
Take any dataset go back as long as you want, it’s a fact and if we look at what to expect, on average, your bull markets last for four years, and on average, the upside is 167%. So, the point is don’t miss the bounce.
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