Hi readers,
Thinking of sharing some of my thoughts regarding the current situation in the market.
Forecasts of an impeding economic global recession have been consistent and abundant so far into the year 2022; from investment banks to billionaires. Of course there are the other school of thoughts arguing that recession may not happened eventually and they believed that FED will be able to engineer a soft-landing.
Personally, I believe that the rising commodity prices may work to cool off consumer demand heading into the second half of the year. However, one needs to note that a slowing economy is not a shrinking economy and there is a stark difference between these two conditions. If an economy shrinks, it will most likely lead to heavy job losses, falling wages and a pretty hard time for the consumers. When an economy slows, it increases the possibility of stagflation but enables unemployment rates to stay low as well. A recent survey of the US consumers had indicated that 80% of the Americans are expecting a recession to come this year, however, most economists are not convinced with the economic data that had been released so far. Only a mere 30% of the economists surveyed by Bloomberg expected a recession within the next 12 months (but I believe that based on current market level, more than a 50% chance is been priced in).
Current market sentiments remained weak with news agencies constantly bombarding the public with doom and gloom news. Add to the pack are some finfluencers on social media that tell investors to sell stocks. We wake up everyday hearing all sorts of negative news; calling the current crisis worse than the one we had in 2008.
I was in the market back then in 2008, sitting in front of the SESOP machine, keying orders directly into the SGX system. The entire dealing floor was filled with calls coming in with their sell orders and there was no buyers to be found. That was the first time in my career, ever experiencing such a phenomenon in the market place. Merrill Lynch was approaching us a week prior to the Lehman’s failure announcement, asking us to underwrite a note to raise funds for them. It was a chaotic moment and of course, hindsight, Bank of America announced the takeover of ML in the weeks that followed.
To be honest, the current situation is far from 2008. We don’t see crazy things like no buyers for big caps like the banks, etc. There was no rumours of retrenchment going on around us here in Singapore (by the way, we had that during that period of time). DBS who had never exercised any retrenchment program back then, and since there, decided to start retrenching staff and sadly, I was one of the victims.
I called the market recovery back then in 2020 a V-shaped one as a result of central banks interventions and I have learned my lessons in the past 20 years, not to go against the wishes of the central banks, who have the ability and capability and willingness to do everything within the power to achieve their desired outcome. So is this one, in which the FED is bent on bringing inflation down.
But investors will also need to take note that the midterm election in US will caused some uncertainties in the market, especially now that the US is experiencing inflation numbers not seen in the last 40 years. Share prices will experienced some overhang as a result of this political uncertainty. Historically, during the midterm years, the market had always consolidate or even pulled back prior to the midterm election which is evident in the chart below. And post election, the market will start going higher in view of this uncertainty being removed. And the ruling government continues its drive to stimulate economic growth by implementing fiscal policies. I believe this year would not be any different. Thus, my forecast of a U-shaped recovery of the US economy. Oh yes, the last time that the market had a similar problem with inflation, in the 1970s-1980s, it was a U-shaped recovery then as well.
Looking at the above chart, it seems that there is some resemblance to a typical midterm year.
For the records, in the past 96 years, there are only 6 times that the S&P500 closed the year losing more than 20%, namely year 2008, 2002, 1974, 1937, 1931 and 1930 (refer to table below). Even if the market did close down more than 20% for this year, it makes good sense to use this 2022 as a year to accumulate good companies into your portfolio (based on probability using historical data).
S&P 500 Total Returns by Year
| Year | Total Return |
|---|---|
| 2022 | -20.43 |
| 2021 | 28.71 |
| 2020 | 18.40 |
| 2019 | 31.49 |
| 2018 | -4.38 |
| 2017 | 21.83 |
| 2016 | 11.96 |
| 2015 | 1.38 |
| 2014 | 13.69 |
| 2013 | 32.39 |
| 2012 | 16.00 |
| 2011 | 2.11 |
| 2010 | 15.06 |
| 2009 | 26.46 |
| 2008 | -37.00 |
| 2007 | 5.49 |
| 2006 | 15.79 |
| 2005 | 4.91 |
| 2004 | 10.88 |
| 2003 | 28.68 |
| 2002 | -22.10 |
| 2001 | -11.89 |
| 2000 | -9.10 |
| 1999 | 21.04 |
| 1998 | 28.58 |
| 1997 | 33.36 |
| 1996 | 22.96 |
| 1995 | 37.58 |
| 1994 | 1.32 |
| 1993 | 10.08 |
| 1992 | 7.62 |
| 1991 | 30.47 |
| 1990 | -3.10 |
| 1989 | 31.69 |
| 1988 | 16.61 |
| 1987 | 5.25 |
| 1986 | 18.67 |
| 1985 | 31.73 |
| 1984 | 6.27 |
| 1983 | 22.56 |
| 1982 | 21.55 |
| 1981 | -4.91 |
| 1980 | 32.42 |
| 1979 | 18.44 |
| 1978 | 6.56 |
| 1977 | -7.18 |
| 1976 | 23.84 |
| 1975 | 37.20 |
| 1974 | -26.47 |
| 1973 | -14.66 |
| 1972 | 18.98 |
| 1971 | 14.31 |
| 1970 | 4.01 |
| 1969 | -8.50 |
| 1968 | 11.06 |
| 1967 | 23.98 |
| 1966 | -10.06 |
| 1965 | 12.45 |
| 1964 | 16.48 |
| 1963 | 22.80 |
| 1962 | -8.73 |
| 1961 | 26.89 |
| 1960 | 0.47 |
| 1959 | 11.96 |
| 1958 | 43.36 |
| 1957 | -10.78 |
| 1956 | 6.56 |
| 1955 | 31.56 |
| 1954 | 52.62 |
| 1953 | -0.99 |
| 1952 | 18.37 |
| 1951 | 24.02 |
| 1950 | 31.71 |
| 1949 | 18.79 |
| 1948 | 5.50 |
| 1947 | 5.71 |
| 1946 | -8.07 |
| 1945 | 36.44 |
| 1944 | 19.75 |
| 1943 | 25.90 |
| 1942 | 20.34 |
| 1941 | -11.59 |
| 1940 | -9.78 |
| 1939 | -0.41 |
| 1938 | 31.12 |
| 1937 | -35.03 |
| 1936 | 33.92 |
| 1935 | 47.67 |
| 1934 | -1.44 |
| 1933 | 53.99 |
| 1932 | -8.19 |
| 1931 | -43.34 |
| 1930 | -24.90 |
| 1929 | -8.42 |
| 1928 | 43.61 |
| 1927 | 37.49 |
| 1926 | 11.62 |
Investing during a stock market crisis gives investors great gain in the subsequent years
This is plainly mathematics. Now that the market is down approximately 22% on the S&P500, assuming that you have bought into the market at the turn of the year, even if the index goes back to where it started this year, it would be a 0% for the year 2022. And if market rallies another 10% in 2023, your total gain for the 2 years would be 10%.
But if you buy now, in the same situation, you would have gain 32% in 2 years, 3.2X more than the earlier investor mentioned above.
Of course, I am not advocating investors to plainly buy without doing their homework. I am saying that investors should buy into good companies with earnings visibility and enjoying a competitive advantage, and not simply buy into companies just because they are cheap (by the way, everything in the market now is cheap).
Example: Alphabet Inc.
Just for an example, I would use the company Alphabet. In the last reporting season, Alphabet’s revenue came in below expectations ($68.01 billion vs $68.11 billion expected). I believe that the fall in revenue is the result of the economy opening up post-covid as more people returned back to work and spend less time on their devices at home watching YouTube. This is true for the other regions as well like Europe and Middle eastern markets. However, the company’s cloud business expanded growing 44% and beating estimates as more big enterprises shift their workloads away from their own data centers. However, the cloud division is still losing money, reporting an operating loss of $931 million, compared to $974 million a year earlier. We might be seeing this business unit gaining traction in the coming quarters. I also believe that the topline numbers enjoyed by the company in 2020 and 2021 was a result of the various lockdowns happening around the world as companies spend more on online advertising, capitalising on the lockdowns. Alphabet revenue grew 41.5% in 2021 alone and that shed some lights on why the revenue for 2022 did not meet expectations (as covered earlier, the result of countries reopening and back to office work arrangement post covid). In another words, the watermark established in 2021 was a high one, thus, the revenue did come in slightly below expecations.
Next we look at the ability of the company to generate free cashflow and their market share.
The company was able to increase their free cashflow by more than 6x in the past 10 years. I believe that the pandemic expedite digital adoption all across the world and thus, Alphabet was in a good position to leverage on that turning into 2020. But based on the past 10 years, it is clear that the management has been doing a good job in generating FCF from the business.
The company’s topline numbers has been increasing over the years since 2010 (refer to above chart).
As for Google’s digital ad revenue, it is still enjoying the pole position in terms of market share in the US at 26.4%. The next closer competitor is Meta Platforms, which is currently experiencing problems of its own. There is a concern here that the US market share of the company is shrinking whereas Amazon is gaining some ground, but Alphabet’s global digital advertising are gaining more than its losing back at home (refer to table below).
Ok. I guess as I will go so far in sharing part of my analysis of Alphabet Inc. Of course there are other companies that I am positive about like Amazon and Microsoft, just to name a few. This is the time that market gives us the opportunity to own a good piece of business at a discount.
As famous investor Warren Buffett said, “The stock market is a place where investors head for the door when the shop starts offering discount.”
Just for the fact that someone is lowballing you for the share of a good business that you hold doesn’t mean that you need to sell to them. They may quote all kinds of excuses like “recession is coming”, etc. It don’t mean that the good company that you are holding will stop generating free cashflow and good return on capital invested, focused on the longer term.
And last but definitely not the least, a lowing economy is not a shrinking economy! Oh yes, Warren Buffett sunk $40b alone in 1Q 2022!
Wishing all a great day ahead and I need to go catch some sleep as its already 2am here.