Han Dieperink

Since 1926, the S&P 500 index has fallen by more than 20 percent fifteen times. On average, the index fell 34 percent in seventeen months during such a period. As many as eleven of the fifteen times the market paused somewhere between 15 and 20 percent price decline, just as it is doing now.

Then some of the earlier losses were made up for. On that basis alone, there is a good chance that the fall will continue.  

Nowadays, when the term stagflation is mentioned, everyone thinks back to the 1970s. Anyone who suggests a stagflation scenario as a real scenario for the future is immediately reminded of the many differences between then and now. The vast majority of people in the financial world started working after the 1970s. If they were born then, it is not a period they actively remember.

The US national debt recently passed the 30,000 billion dollar mark. Since March 2020, the US national debt has increased by 7,000 billion dollars. All those “Treasuries” are ultimately part of one’s portfolio. Certainly now that some major buyers have dropped out this year, it remains to be seen whether enough buyers will remain.

Financial markets do relatively well when it comes to predicting the future. Collective wisdom is ultimately translated into share prices. Index investors benefit from this collective wisdom and are effectively free riders to the hard work of many. Yet in the stock market, it is not easy to distinguish between what is possible and what is real.

After Russia, the eurozone is probably the big loser in the Ukrainian war. Not so much politically or strategically, but economically. The eurozone economy was already ailing before the Russian invasion. That is why the buffers are not big.

Major investors like Warren Buffett and Goldman Sachs are increasing their positions in oil stocks. Buffett recently bought large positions in Chevron and Occidental Petroleum. For Goldman, Exxon is the favourite. The price of oil this year peaked at $123.70 a barrel on 8 March and has since fallen to around $100 a barrel. Historically, these are not low prices, but apparently there is more in the barrel.

The Nasdaq now trades more than 20 percent below last November’s high. With Big Tech remaining under downward pressure, other parts of the Nasdaq look promising. 

There has actually been a correction phase since February last year. First in the more speculative parts of the market, such as technology companies that are not making profits, SPACs or software companies with extremely high valuations.

For the moment, inflation is largely caused by a sharp increase in energy prices. Two years ago, the oil price was negative for a while, but since then it has been rising rapidly. Sustainability policy measures have contributed to this, because investment in new oil extraction has been under pressure in recent years not only because of the low oil price.

Not surprisingly, Berkshire Hathaway has risen 16 percent this year and has outperformed the S&P 500 by 23 percent over the past 12 months. Pricing power is an important criteria for Mr Buffett and Mr Munger in their selection process. Their company in essence is one large investment portfolio, and one that is resilient to increasing inflation.

After the stock market crash of 1987, measures were taken to prevent a new financial drama in the future. Under Ronald Reagan, “The President’s Working Group on Financial Markets”, now better known as the Plunge Protection Team, was formed in 1988.