Facing the bear, sector moves, business building, micro-caps, value and process…

Jul 08, 2022

The UK’s FTSE 100 index is so often used as a go-to measure of how things are going in UK equities, but the truth is it’s barely representative of what investors really experience. This year we’re seeing that close up.

With the FTSE 100 down 4.3% this year, you might be forgiven for thinking that markets here are holding up pretty well. But the fact is that the blue chip index is being propped up by large energy stocks and a few defensive names.

It’s a very different story when you look at the FTSE 250 (down 21%) and the AIM All Share (down 27%). These moves are much more in tune with what’s going on in markets in the US, where there’s broader recognition of the agony that investors are suffering.

Year to date performance

UK FTSE 100 (down 4.3%)
UK FTSE 250 (down 21.1%)
UK FTSE AIM All Share (down 27.1%)
US S&P 500 (down 18.6%)
US Nasdaq Composite (down 26.6%)
US Russell 2000 (down 22.1%)

Source: Google Finance (YTD performance figures at 08 July 2022)

A good example of that recognition came in a post this week from Ben Carlson at A Wealth of Common Sense: On the Inevitability of Bear Markets. He offered a reminder of just how extreme market moves have been over the past two years - and the psychological challenges of holding stocks through these cycles.

One of the depressing features of markets in 2022 is that almost every sector - bar energy - is under water. High inflation compounded by surging energy and commodity prices, rising interest rates, fears of a recession and war on the edge of Europe have all played a part. One article this week that took a look at the impact on sectors was by Gary Jackson at Trustnet: The sectors where there’s the biggest gap between 2022’s best performers and the worst. His research looks at the best and worst fund performances on a sector-by-sector basis and finds massive variation in returns between funds. You could easily have had high energy exposure and still underperformed this year.

That kind of volatility in fund performances could well exacerbate the already high state of myopia among fund investors. On that subject, Joe Wiggins at Behavioural Investment presented some ideas on how the fund sector could be shaken up in an effort to deter short-sighted selling by squeamish investors: Should Fund Investors Pay Lower Fees for Making Long-Term Commitments?

Getting back to inflation, Joachim Klement at Klement on Investing looked at research suggesting that central banks haven’t really learnt anything about the true drivers of inflation in recent decades. In particular there’s less and less evidence of a clear connection between rising wages and consumer price inflation. But what there could be is a longer-term link between the weakening power of trade unions and generally lower inflation (see Joachim’s chart below). If so - and it’s far from definite - this period of high inflation may wash through quicker than expected. Read more here: Was it really Fed policy that ended high inflation?

But enough with all this doom and gloom. If you’re looking for reasons to be optimistic you could do worse than read this post from Jeff Hirsch at Almanac Trader: Get Ready for the Quadrennial Rally. Jeff is a legend to fans of seasonal trends in the stock market, and while the current bearish conditions are typical of mid-term (presidential) markets, it could be the prelude to a sweet spot for stocks in the coming months.

Podcasts: Jess Lee, Michael Mauboussin and Ian Cassel

There have been a few excellent podcasts out this week…

On Invest Like the Best, Patrick O’Shaughnessy talked with Jess Lee, a partner at the venture capital giant, Sequoia Capital. Jess has an impressive background in product management (including Google Maps) and they talk at length about the importance of community, company building, culture and communications. It’s really worth a listen to get that “company founder-turned VC” view of business and investing, especially through the lens of such a well respected firm like Sequoia. And incidentally, the thinking that goes into Patrick’s questions is hugely impressive, and he gets some really interesting stuff out of his guests.

Meanwhile, Michael Mauboussin, the highly respected analyst, researcher and investment thinker was a guest on Investment Uncut: Multiples are not valuation with Michael Mauboussin. It’s an excellent review of some of Mauboussin’s best known studies, including his book Expectations Investing, his studies of valuation and of investment process.

Finally, Jim O’Shaughnessy on Infinite Loops had Ian Cassel, a well known small- and micro-cap investor in the US: All Great Things Start Small. Unlike Patrick (his son (see above)) Jim throws a lot of humour around in his podcasts - he’s clearly having a ball with this show. This is an absolute must listen for anyone with an interest in investing at the smallest end of the market, where non-existent research and the need to be hands-on with your approach demands a very specific mindset.

Have a great weekend,

Ben