Financial Notes

Hey 👋

It’s been a little while since I last wrote a Financial Note, sorry for that. It’s been a busy last 6 weeks with my son being born (a little ahead of schedule!) and as I wasn’t quite as prepared as I should’ve been, i’ve been playing catch up ever since.

Anyway, you probably didn’t open this to read about my organisational woes, and instead came to find out what the hell is going on in the stock market in the last month whilst i’ve been away, so here is this weeks snippet!

MARKETS 📈

1-Month Performance Breakdown:

It doesn’t make for pretty reading.

Markets have certainly been in turmoil due to the whole US - Iran war, i’ll share some of technicals as to why this is the case, beyond just the fact there is missiles flying everywhere.

But before I do that, if you’re currently checking your portfolio 17 times a day worried about the markets, and the value of your portfolio declining, firstly, you’re not alone, here’s a snapshot of mine in the last month…

If this is the first time the market has dipped since you began investing, you may feel a little anxious right now, understandably so, but hopefully what i’m about to share next will ease that anxiety just a little with my second point.

Which is, if you’re a long term investor, now is not the time to panic.

I repeat, NOT the time to panic. Let me share this with you…

Above is an interesting piece of data.

It shows some devastating historical events that took place throughout history.

Pearl Harbour, 911, and the Russia Ukraine war, some more fresh in the memory than others, all of which have their historical relevance.

Now when it comes to the stock market, well markets invariably get shaken by such major events as we can see by the dark blue bars.

In the 13 events mentioned, markets dipped anything between -0.6% (a minor move I must say) to -19.8%, just 0.2% off what would be considered a bear market.

But the important perspective i’d like to provide is actually the orange bars next to them.

It shows the returns just 1 year after these major events happened.

Now i’m not going to sugar coat things, it wasn’t perfect by any stretch, some major events coincided with other economic events that caused further pain for investors.

I’m thinking 911 which happened to coincide with the dot com bubble for example.

So not every stock market decline and subsequent 1 year returns shown can be directly associated with war.

However, what the data does show is that on 7 of the 13 occasions, market returns were positive just 1 year later.

And in most cases, substantially positive, upwards of 10% for the most part.

So when your looking at your portfolio in the red, just know…

1) It could be worse!

2) In time, it should get better!

Obviously I can’t make guarantees, and when investing your capital is at risk and past performance is no guarantee of future results BUT, we only have historical data to look at as our guide for the future.

And if history is anything to go by, well over a long enough time period, the global equity market has been positive, which is the perspective I try to maintain when my portfolio looks the way it does right now.

Ok, so hopefully that puts your mind at rest a little, but sometimes to feel more in control and a little more confident, its useful to know why markets have fluctuated so much, so lets briefly touch on two big points…

1) Markets are emotionally unstable.

As investors, we massively over index on fear.

Fear and greed is what drives markets both positively and negatively. In this case, investors are reacting to uncertainty, and sometimes it’s a case of sell first, ask questions later, with markets trying to predict the future, without knowing what is going to come out of Trumps mouth next!

This fear creates a feedback loop, as prices drop, algorithmic trading and panic selling by retail investors can accelerate the decline, sometimes overshooting what the actual economic impact justifies.

Although two things, markets are relatively muted right now with all things considered, its not a market crash, its not even a market correction yet which is something to “bear” in mind (excuse the pun).

Secondly, economic impact could be painful, and thats what markets are mindful of, so lets talk about that as our other big talking point.

2) Oil prices.

You probably keep seeing these headlines…

Now you might be thinking, unless you're the CEO of BP, or planning to fill your car up in the next week, why the hell would I care about oil prices, especially in relation to the value of my investment portfolio.

Well, oil prices are dictated by supply, and some of that supply comes from the Strait of Hormuz, a region in the gulf that is currently shut off due to the conflict which causes issues for corporate health.

First, when energy costs rise, everything from manufacturing to shipping becomes more expensive. For most companies, this shrinks profit margins, unless they can pass 100% of the cost to consumers (which is rare).

Second, with inevitably some pass through on costs, this can spike the inflation rate. This erodes the real value of cash holdings and future cash flows. If a company has £10M in the bank, but the cost of materials jumps by 10% due to energy driven inflation, that capital is effectively worth less, weakening the companies overall financial position.

Roll that out over an index of 100, 250 or 500 companies, its quite the value destroyer!

These two factors, amongst others, are some of the reasons why the stock market has reacted in the way that it has.

It's why the FTSE250 which is even more vulnerable to energy driven inflation has been effected more so than the FTSE100 as the UK is set to be impacted by this economically, even though we didn’t start it!

Although thats a self-sufficiency, self-vulnerability, political debate for another day.

BONUS STUFF ⭐️

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