Is The Worst Yet To Come In The Stock Market This Year?
Just when I thought the global inflation situation was improving, the world is now facing more problems that will prevent the economy from recovering faster. The stock market often takes cues from the economy, so I expect the stock market to stay muted for a while too.
My Observations
The Energy Crisis in Europe
For many years now, several European countries have been relying heavily on Russia for its energy resource. When Russia invaded Ukraine, these countries imposed heavy economic sanctions on Russia. As a form of retaliation, Vladimir Putin decided not to sell gas supplies to Europe until certain sanctions against Moscow were lifted.
This caused electricity prices to surge. For example, wholesale electricity prices for 2023 in France reached a new record, surging past €1,000 per megawatt-hour. This is a ten times increase from a year ago. To cope with living expenses, some Europeans are skipping meals.
To put this into perspective, find out what your current utility bill is now. Multiply it by 10x and you will feel the pain instantly. For the middle class, this means having lesser money to spend on both necessities and discretionary spending such as shopping.
Many citizens of these affected countries are furious as they feel that their government created these difficult conditions for them. This brought about civil unrest in the form of street protests. This has already happened in the Czech Republic, Italy, and Denmark. Some of them refused to pay their energy bills. Instead, they grew their bills into big metal cans.
Source: @Twitter/The_Real_Fly
Energy-intensive companies in industries such as steel, chemical, glass, and toilet paper are forced to shut down too. Hakle GmbH, a well-known maker of toilet paper, filed for insolvency because of higher energy costs.
When winter arrives in the next few months, this situation is likely to worsen.
Just like oxygen is to us, energy is essential for the economy to function. With uncontrollable energy costs, the entire European economy is going to face potential corporation shutdowns, higher unemployment, lower domestic consumption, and other painful situations. This will push the economic growth of many European countries downwards.
China’s Sluggish Economy
China is the world’s second-largest economy and it is expected to take over the USA eventually. The world is watching China very closely because it is also known as the factory of the world. Any slowdown is definitely going to weigh on the global economic outlook.
As the world is restoring normalcy, China is still struggling because of its “zero-COVID” policy. There are still lockdowns and residents cannot resume their daily lives. Thus, it affects business activities too. Many companies source their products from China. Products like Nike and Under Armour are made in China. Any prolonged lockdowns will cause issues in the global supply chains.
Despite the government’s economic stimulus to support China’s economy, many analysts are forecasting 3% or lesser growth for China’s economy. It’s the lowest growth in decades.
A Deglobalising World
The world leaders are distancing themselves from each other. Smaller countries are forced to take sides – China’s or the United States’.
Singapore’s Finance Minister, Lawrence Wong, said: “The golden age of globalisation that we all enjoyed in the past 30 years is probably over, and we are entering a new order, which will be characterised by greater geopolitical contestation and potentially more fragmentation in the global economy.”
If this trend of de-globalisation continues, we will see more policies aimed at curbing exports, giving rise to protectionism. For example, the US government blocked Nvidia from selling its semiconductor ships to Russia and China.
The world benefits when everyone is able to buy and sell anything in any country. When corporations are restricted from selling their products overseas, it prevents them from growing.
This is not good for investors because a company’s growth will be limited to its respective domestic market.
Overall
Europe is down. China is down. The United States is raising interest rates to battle its decades-high inflation and we know rising interest rates will put brakes on its economy. The situation in the United Kingdom is similar to the United States. To the best of my knowledge, there are no bright spots in any major economy right now.
Those issues I have raised above will take some time to recover and they cannot be eliminated by waving one’s magic wand. I certainly did not expect things to change so quickly from a year ago, but we are here now.
In terms of my investment strategy, I have laid out promising industries to invest in for the next decade. I will also encourage you to shore up more cash in your personal savings account and split your stock purchase amounts into smaller tranches.
Recently, I met up with a managing director of a prominent bank in Singapore. He shared that many of his clients have lost a huge chunk of their money in the stock market. The next wave will be recognising losses in their portfolio of smaller companies. Many of his clients are not in the mood to think about investments and prefer to stay on the sidelines. If this similar situation is happening across the world, we should not expect the stock market to recover any time soon because it is institutional money that moves the stock market – not retail money.
Both of us agreed that it is most prudent to adjust our expectations of portfolio returns downwards.
The S&P 500 index is currently at major support right now. If it breaks below further, it will be very ugly.
The key thing for any investor is to stay in the game. Never make silly decisions such as taking excessive loans or adding more positions in unprofitable companies. That’s just taking on more risks. Reduce as much risk as possible, re-adjust your portfolio towards companies that are selling mission-critical products/services, and have the patience to ride out of this market downturn.
If there is any consolation, this is it:
We spend more time in a bull market as compared to a bear market. This is supported by data from 1957 to 2018. If we play our cards right, we will be able to recover our losses and make further substantial gains in the new market cycle/bull run.
If you’ve found this article valuable, this is for you. In my private telegram group with my community, I share updated investment insights and practical tips that have helped many of my members navigate this market downturn. Join us for free if you haven’t already – click here to access it!