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The Chart's we keep returning to

2022 has been a torrid time for virtually all asset allocators and investors as it’s been a rare “everything down” year. QE was always going to be an experiment whose ending was not known.

The answer to the question many posed throughout the last decade and a bit, “so how do we actually get out of QE?” is beginning to appear.

We don’t, is the answer, at least not without some pain. There has been no hiding place. The return of inflation has ravaged “lower risk” assets such as bonds, both Government and Corporate, while the real shock has been that inflation-linked bonds (which one would assume from their title would be ready-made for just such an environment) have fared in many cases even worse.

Equities have suffered, but then so has gold, another oft-touted haven against inflation. Even cash, despite holding on to its capital value, has lost value in real terms due to inflation.

Everything comes to an end, as will this cycle, but it is important to have survived said cycle in the first place to be able to position correctly for its next phase.

With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future." — Carlos Slim Helu

The charts that we keep returning to for clues as to how this cycle is most likely to move on are below.

They are from BCA Research who identified the most likely blueprint for what is to come as being learned from the 1981-82 period.

Back then, as now, central banks were committed to doing “whatever it takes” to break the back of the inflationary monster that had exploded into the world’s atmosphere like some grumbling volcano, dormant no more.

Back then, as now, a conflict between two energy-producing nations, Iran and Iraq, had caused disruption in supply and prices. And back then, as now, the equity sell-off was led by declining bond prices and excessive valuations coming back to earth, to be followed by a profit-driven sell-off as recession bit.

It’s what happened next that is so interesting.

We’ve seen a number of bear market rallies so far and you never know when you’ve reached the final one until you can look back and realise with hindsight. With what appears to be brewing this winter though, it is hard to believe that we’ve yet to see the profits sell-off. If it comes, look at what happens afterwards, if the 1981-82 blueprint plays out.

Anyone who claims that they can accurately time a market is either a fool, a liar, or unaware just how lucky they’ve been.

We know, of course, that history never repeats exactly. BUT…..if the chart above is anything like indicative, look at the steepness of the bounce when it comes. Being out of the market risks missing an initial surge and, referring to the comment about not knowing whether it is actually a change of direction without the benefit of hindsight, further opportunity could be missed by waiting for the next correction, which may not come.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Peter Lynch

I guess the main message here is that we cannot truly predict when the turn around will come, but we know that right now the price is good, and we know that every Bear market eventually comes to an end and often does so when the outlook appears most bleak. Is now the time to panic, or, with careful planning, is now the biggest opportunity of the next 10 years?

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." — Warren Buffett

If you have concerns about your own portfolio, and would like to discuss it with one of our experts please reach out to PS & Partners on +63 09177750730 or myself


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