Why the panic in the markets?

There are two camps out there when it comes to the expectations for investment markets going forward. In the one camp you find complete panic and even some people hinting at conspiracy theories. If you listen to someone like Robert Kiyosaki, he will have you believe that there is something fishy going on; that the Federal Reserve (the Fed) and Treasury have lost their independence and that you are going to be wiped out in the greatest market crash ever. He claims that the Fed has made a deal with the CEOs of companies, whereby the Treasury continues to print dollars so that the borrowing costs and discount rates remain low for companies, resulting in inflated share prices. He believes that the Fed cannot solve the problematically high inflation and that your only solution is to buy bitcoin, silver and gold.

In the other camp you find analysts like Mike Wilson from Morgan Stanley and Johnathan Krinsky from BTIG, who predicted that the markets would go into bear territory (-20%) in 2021 already; based on actual market analysis and technical evaluations. They are also of the opinion that the Fed made a big mistake when they considered the elevated inflation numbers “transitory” in 2020 and 2021. This resulted in the Fed’s lowering interest rates too much and keeping them too low for too long. This caused shares, bonds, crypto and almost anything investable to become too expensive. But Wilson and Krinsky do not believe that we will see another 30% down from the current levels because the S&P500 is already down 20% plus. They also believe that the Fed can solve the problem by increasing interest rates and that the USA might go into a recession which will see markets go down another plus-minus 10%, but that is the way markets overcorrect. Once the economy slows down too much, interest rates will drop again, which will stimulate the economy so that shares will rally once more.

The current share price turmoil is not unique. Look at the graph below. Every nine years or so, shares become too expensive and prices drop by 30% plus. This time the Fed made the mistake of believing that Covid slowed the economy down too much in 2020, while they did not take the supply chain disruptions into account. On top of that they never expected a war in the Ukraine, causing oil prices to double; or the zero-Covid policy in China, origin of many of the world’s supply chains.

We have to remember that anyone who has been invested in shares for more that a year, are still okay. The JSE has remained flat over the last twelve months, so you are now back to where you were on 17 June 2021. The S&P500 is down 12% over the past year but up 25% over the last two years, even after the current 20% fall. The rand has been level against the US$ over the last twelve months and even Gold is up only 4,8%. For people who started investing only towards the end of last year, however, the pain is real and it will take some time to get their portfolios positive again.

Please remember that what we are seeing now is not unusual. Look at it this way: we are watching just another American movie, with much the same story as so many that came before, just with different actors. And we all still know that the hero will save the day – after a lot of blood, sweat and tears.

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