This year has been a humbling reminder of the cyclical nature of stock markets. In the UK, small and mid-cap shares have felt the pain of the sell-off more than most. But generally speaking, markets everywhere have come under pressure.
You don’t have to look too far to find the last major decline like this. In early 2020, stocks fell at their fastest rate on record as Covid began to bite. But unlike then - indeed unlike any correction for more than a decade - this time it’s different…
After the financial crisis in 2008/9, central banks pursued a policy of economic stimulus using quantitative easing to lower interest rates and thus suppress the cost of borrowing. Apart from anything else, this created a strong tailwind for stocks. Indeed, extra economic stimulus through Covid was enough to get the market into recovery mode in double quick time.
Fast forward to today, and a decade of easy conditions and economic growth have given way to a different kind of problem: high and rising rates of inflation. With it, central bank policy has been slammed into reverse. Rate hikes are now just about the only tool they’ve got to try and control spiralling prices.
While inflation itself isn’t the only drag on equity prices right now, the market reaction to more hawkish moves by central banks is not really surprising. Growth stocks, which have performed well for years, have been among the first to suffer. But much more broadly, companies are having to deal with, and pass on, rising input prices, which will inevitably damage earnings.
As a result of this, and unlike any other time over more than 10 years, ‘value’ is becoming mainstream again as a criteria for investing. Stocks that just a year ago were on punchy valuations can now be bought much cheaper. The question for investors, of course, is whether they are likely to get any cheaper from here.
This brings us back to the idea of stock market cycles. Twelve years ago, when I started writing articles about screening strategies for Stockopedia, the market was just clawing its way out of the 2008/9 collapse. It was an utterly brutal couple of years.
How history repeats itself
I remember that one of the things our newly-constructed Guru Screens were screaming at the time was just how cheaply priced shares in house builders…
