The recent increase in volatility in markets has raised the spectre that another stock market crash could be just around the corner.
The emergence of Omicron a few weeks ago sent markets into a tailspin. However, subsequently both the FTSE 100 and the S&P 500 made back all their losses. What drove this sudden reversal was retail investors buying the dip; indeed, a very similar pattern emerged when the Delta variant was first discovered.
Is this a wise move or is it a case of fools rushing in where angels fear to tread?
Will history repeat itself in the event of another stock market crash?
Firstly, to my mind, the likelihood of a stock market crash being precipitated by another lockdown is minuscule. The world is in a totally different place than 20 months ago not only in terms of the vaccines but knowledge about the virus more generally.
Secondly, even if one assumes a worst-case scenario of further lockdowns, I am not convinced that all the same winners will emerge this time around. For example, the incredible run up in the share price of the likes of Peloton and Zoom are, in my opinion, well and truly over. In truth, neither company had an enduring competitive advantage. After all, everyone who wanted a Peloton bike likely already has one; as for Zoom, going head-to-head with the mega-cap Microsoft and its Teams offering was only ever going to result in one winner in the long term in my opinion. As a long-term investor, I am not interested in investing in short-term trends as I am just as likely to pick a dud as a multi-bag winner.
A third difference is rising inflation. In the US, it now stands at a whopping 6.8%, its highest level in 40 years. In the UK, it sits at 4.2%. Inflation tends to build on itself; that is why I personally never believed in the Fed’s transitory notion in the first place.
Most retail investors today have never lived through a period of rising inflation. The last significant bout began in the late 1960s, and during the following decade inflation rose in three separate waves, each peak and subsequent trough higher than its predecessor.
What does all this add up to?
Central banks do not inspire confidence in me in their ability to deal with the rising cost of living. Last month, the Bank of England stunned most economists by holding off raising interest rates. This month, Omicron has given them the perfect excuse, should they so wish, to delay again.
It isn’t difficult to see why the Bank of England and the Fed are reluctant to raise interest rates. With both governments and corporations drowning in debt, the recovery from Covid-19 still at an early stage, and the darling of the stock market, the tech sector, perfectly priced for a near-zero interest rate environment, just the mere hint of a significant rate rise to quell inflation could bring the whole pack of cards tumbling down.
The mantra amongst retail investors that has quelled every single stock market wobble since the Covid crash — “don’t panic, the Fed has got your back” — doesn’t seem to have the same ring to it any more.
