June was gloomy.
Not in London, which is lively, crowded even – and a delight to see. Pavements are busy, restaurants are proving tricky to get bookings in, the river is heaving. I even managed to get to ‘the beach’:
I managed to spend a bit of time down around the Coastal Folly too. I’m still finding my rhythm having two homes but so far it is going pretty well. A London kitchen project is running late / badly which gives us plenty of excuses to be down by the coast.
The UK saw a week disrupted by rail strikes but with Working From Home now an option and so many cycle/etc options it didn’t feel too disruptive for me. It was interesting though how positively the union leader Mick Lynch came across in the media and I think if we do find ourselves in a year of employee-driven strikes he will deserve the credit/blame for it. The RMT appears to be asking for about 9% pay increases for train workers. Drivers are coming up next, apparently, along with GPs (asking for 30%!). We are rapidly getting away from ‘inflation is just spiking up temporarily’ to ‘well, if they’re getting it, then I want it’ and that could take years – and a much more competent government – to shake out.
And it is this inflation gloom which is suddenly pervasive. Not just in the UK, though the UK does appear to be taking a particular bruising. Markets got hammered in June and, lest anybody forgets, they hadn’t had a good run of things earlier in the year either.
In fact, in general equities carnage, the UK’s FTSE remains relatively unscathed. The S&P was down 8% and Australia’s ASX down 9%. Such carnage tends to boost the USD and June saw the GBP fall 3.5% against the USD.
Though the tech sector has been most painfully hit, there aren’t many places to hide. Just the four US heavyweight stocks in the table below tell a painful story (and bonds were no respite either):
UK media (that I read) is full of references to how uniquely weak the GBP sterling is. This is a very UK/US perspective. I have yet to read the (more correct) interpretation that in fact the USD is uniquely strong. With EUR rates still unchanged at -0.5%, there is scope for the Euro to gain significantly, though it has a large Italian bonds headwind that could push it the other way.
My portfolio lost 7% in June. But for me the big milestone in June was breaching my worst yet drawdown. It has now lost 21% from peak – which it has not done (on a month end basis) in the last 9.5 years that I’ve been tracking.
UK readers will for the most part not have hit this painful milestone yet. My performance is worse than most because I am significantly leveraged. June results saw this writ large; in most of my leveraged subaccounts, my holdings lost 7-8%, but due to the leverage my portfolio dropped 11-14%.
Yet there isn’t much evidence the downturn has hit bottom yet. For instance:
- Based on long term earnings multiples (CAPE), the USA remains above historical norms. And earnings could well fall, pushing P/Es up, before we are done yet.
- There is not yet evidence of reaching the bottom among ‘lossy growth stocks’. The likes of DOCU, HUBS, CZOO are not at their bottom yet.
- Interest rates are clearly going to carry on rising. The Bank of England’s governor is talking about increasing the speed of increase – from 0.25% to 0.5% per jump. The ECB hasn’t even actually increased rates yet, after 11 years.
- The Ukraine war continues, and has a good chance of lasting through the European winter. This could have unpredictable but painful effects on energy prices / consumer sentiment / inflation.
I have lost two years’ of growth – the unitised return on my portfolio being back at the August 2020 levels. In the scheme of things, this is not too bad. A further 5% (taking the drawdown to 25%) would take us back to July 2019 – which doesn’t seem too horrendous either. We have to drop a further 10.5% from today (29% from peak) to take us back to July 2018, which feels possible. If we fell 40% from peak, which is roughly as bad as most bear markets get (though I would get there first due to leverage), we would be back in early 2017. That feels, right now, in the ‘unlikely but possible’ zone.