In today’s Exponential Investor:

  • Did the “Everything Bear Market” really include UK stocks and gold?
  • Stodge and dividends help in tough times, but what else?
  • Follow the analysts. Follow the PE funds. Where do you go?

“How long will we be in a bear market?”

That seems to be a popular question among individual investors at the moment.

One source said the bear market began on 4 January 2022, when the S&P 500 last peaked. Based on the average length of past bear markets – 472 days – that puts the bottom of the bear market somewhere around April 2023.

In other words, we the bear will be clawing at us for another four months, which is an unattractive prospect.

A completely different source pointed out that the bear market really began on 13 June this year, when the S&P had fallen 20% from its high in  January. Using the same bear market average, that means the bottom might not be found until October 2023.

That is nearly a year away, and is a doubly unattractive prospect.

Yet… for all the negative news about the “Everything Bear Market”, not everything is down. Take this note from Barron’s, for instance:

For all the chatter about the bear market this year, the Dow Jones Industrial Average has managed to experience only benign losses.

It’s been a rough year for the S&P 500 and Nasdaq Composite, which fell as much as 25% and 36% from their all-time records, respectively. Any drop greater than 20% from a recent high is defined as a bear market.

A cursory look at the UK market tells a different story to the US one. The FTSE 100 is up 1.68% for the year to date. If you bought gold in pounds at the start of the year, it’s currently worth 8% more.

Now, perhaps the Nasdaq Composite isn’t a fair comparison to the FTSE 100, given how heavily weighted the former is to technology stocks. The UK’s tech index, the FTSE techMARK 100 – a cousin of the Nasdaq Composite – is down only 3% for the year to date.

That’s hardly bear market territory.

In fact, the UK has been one of the best performing developed markets this year, in spite of the unstable political backdrop:

As one Ben Yearsley, a director at Fairview Investing notes:

I’m not sure many at the start of 2022 would have put the UK down as one of the best performing markets but that’s the way it is now looking. There is clearly something to be said for stodgy companies paying nice dividends in a complicated market backdrop. In the new world of higher rates, income will probably continue to be an important focus.

Investors favour dividends in difficult markets

Is this really an Everything Bear Market, or is this just a market fuelled by volatility? That question is relevant because, right now, the movements in the broad indices suggest that the big falls are perhaps a US problem…

While US stocks tank and the crypto enters another brutal winter, the UK stock market has fared reasonably well. At worst, the UK market could be described as range-trading.

Regardless of what we are calling this largely US stock market downturn, 2023 is just around the corner, and investors would be wise to think ahead. Or, even better, think like a billionaire.

Warren Buffett is said to have uttered everyone’s favourite contrarian phrase “be fearful when others are greedy, and greedy only when others are fearful”. Perhaps that was wise advice for all those coming up the investing ranks 50 years ago.

But remember, there is only one Warren Buffett. The market conditions that enabled him to grow his pennies into pounds no longer exist today.  

Buffett’s career has spanned: the unprecedented expansion of credit; industrialisation of emerging markets countries with populations of billions, the consequent development of huge middle classes and rampant consumerism; plus huge gains in technology efficiencies. All these are now incorporated into the prices of stocks and bonds.  

In short, a 21st century Warren Buffett, starting out now, will have to exploit a completely different set of opportunities (and threats).

For the first time since 2008, it appears that it’s a good time to be in the rocks and stocks business, with Bloomberg writing:

After years out in the cold, investors are finally warming to commodity hedge funds again as wild price swings and talk of a new supercycle draw interest back to the sector. 

The top 15 commodity-focused hedge funds have increased their assets by 50% this year to $20.7 billion, according to preliminary data from Bridge Alternative Investments Inc. Some recent entrants have already closed to new investors, and big macro funds are hunting for talent as they beef up commodities teams.

Household names and new entrants in the hedge fund space are rapidly increasing their investment in commodities, with assets under management (AUM) four times higher than in 2020.

Source: Bloomberg

So, what does this tell you? Don’t look at the price. Don’t be obsessed with the news. Don’t worry about any US stock rout. Private equity (PE) firms are cashed up and wanting to grow their assets over the next decade.

I recently spoke with a former coal analyst who lamented how there weren’t enough resource analysts around to cover the commodities sector. As the commodities market sank through 2012 to 2016, the bad ones were fired, the mediocre ones were shuffled to another part of the investment business and the good ones left to start their own resource private equity funds.

And it’s the latter you want to pay attention too.

No PE firms that are about to take a large stake in a resource business give a hoot about the daily, or weekly, price of a mineral.

No hedge funds will pay for staff that they don’t need.

Why? Because big money isn’t investing in the short term. It’s not taking a stake in a business based on short-term price cycles, but looking for a multi-year investment.

That is exactly what big money is doing at present. Rather than panicking, it’s slowly assessing future projects and thinking many years into the future. What really matters is not the market of today, but the opportunity of tomorrow.

The UK market is fortunate to have many resource companies listed on the FTSE 100. Sometimes you just need to hold your nose and jump right in – (purported) bear market or not.

I’ve said it time and time again. Watch what big money does and follow it.

Until next time,

Shae Russell
Co-editor, Exponential Investor