Equity markets are off to a good start in 2023, with cooling inflation flagging a slowdown in the interest rate hikes by the central banks. However, rudimentary challenges persist as we head to 2023, a start of a new era.
Investing Dynamics from 2008-2022
Ever since the global financial crisis of 2008, we have been in a state of low inflation, low-interest rates, expansive fiscal and monetary policies, and an immersive technology boom.
Inflation scraped the barrel in 2008, and pushing it back, presented a tough challenge. Central banks changed lanes to simulate inflation – by committing to hold back rather than fight it aggressively.
Therefore, central banks started Quantitative easing, whereby they buy government bonds for an extended period and only raise rates upon the completion of their announced purchase program. The Fed’s reluctance to raise interest rates even on the staunch signals of relentless inflation in 2021 conveniently proved this fact. The Fed repeated similar actions by stopping the interest rate hikes after the markets declined in 2018.
When the pandemic hit, the government pulled out all stops on spending altogether. Coupled with the problems of supply chain disruptions, this pushed us back into a high-inflation regime.
Although, it is hard to deny that the relaxed Fed and regulatory policies were effective, these distorted credits, asset prices, and liquidity in ways that are hurting us today.
Amid all this, we glimpsed a technology boom. The last decade saw phenomenal innovation, led majorly by the transition from desktop to mobile and the rise of data. This revved the growth of AI, e-commerce, social media, and biotechnology. The FAANGM stock index consisting of Facebook (now Meta), Apple, Amazon, Netflix, Google (now Alphabet), and Microsoft gained more than 800% during the last 10 years vs SP500 gains of 170% (excluding these stocks).
Rampant as it was, the government watchdogs were too slow to acknowledge the need and importance of regulations in the industry.
Investing Dynamics since 2022
But things are very different now. Presently, high inflation is threatening to become entrenched in our systems. The Fed has woken up and has taken an aggressive stance. It has started to wind down its balance sheet and raise interest rates. Fiscal spending is likely to tighten, and another corporate tax rate cut is unlikely to be seen.
Moreover, the FAANGM group is battling headwinds as they brace for a potential slowdown when another recession hits. Regulators across the world are clamping down on tech giants. New competitors and technologies are jeopardizing the hold of big companies on their markets. On top of all, prominent tech companies invested heavily in personnel and new products predicated on the idea that the shift to virtual life would be enduring—something that didn’t pan out as they would have hoped.
In response, big tech companies are retrenching, cutting expenses faster to navigate the demanding times.
Betwixt these immense changes, how can we resort to the same investing approaches that existed over the last decade?
Resort to a top-to-the-bottom approach to investing, where you look for key sectors and then select stocks within those sectors.
Allocate a higher part of your portfolio to sectors that support all the fundamental changes. These are most likely non-cyclical and defensive sectors such as Health Care and Consumer Staples.
Second, look for companies that don’t rely on the Fed or government loose policy and can take the mantle of generating sustained growth. Such companies possess the ability to weather the current storm and come out stronger.
That all calls for more active investing for greater control over the how-when of investing.
With the right set of personalized tools that help you identify your target returns, the risk levels and allocate your capital based on market dynamics, you can succeed in both the stock market and in building long-term wealth.
