I will come on to the extraordinary events of the last week shortly. But first I wanted to be absolutely clear on one very real risk which many individual investors, or their advisers, are taking right now.
Times like these are the mother of some great commentaries, and I have enjoyed a good few of these across my desk in the last couple of weeks. But the usual trite and complacent commentaries also flow. You know the stuff - the market always recovers - sit it out - rises come and go. These people are dangerous to more than your wealth.
Why? Never has a UK generation been so dangerously exposed to a prolonged downturn in financial markets. The financial services industry is dependent on the accumulated wealth of the Baby Boomers, and the Baby Boomers are horribly dependent on they or their advisers knowing how to defend their life savings – those on which many intend to rely on through a long retirement.
But there is a problem. Most of our industry has no defence in place to protect the assets of the Baby Boomers, who don’t have the luxury of time to rebuild their wealth.
Our industry even has a textbook name for this – sequencing risk. It is about the order in which investment returns occur. In a nutshell, the risk is that your SIPP and ISA and other assets take a big hit at exactly the wrong time for you, and your life plans are up in flames.
Lip service might be paid to this risk, but our peers rarely have a process to protect you from what we call catastrophic risks, falls which are deep and prolonged. For example:
- It took 16 years for the US stock market to recover its 1966 peak.
- It took 16 years for the technology index to return to its high of 2000.
- It took 34 years for the Japan market to recover after 1989 peak.
The falls ranged from approximately 50% to 80%.
That seems tough enough, but now imagine you also need to withdraw 4% every year to meet your income needs. The Dennehy Wealth financial planning team can model such periods and the outcomes – without boring you with the detail, there is a very good chance you might run out of money, and this period can become very stressful for the investor and their family at this most vulnerable stage of their life.
If anyone tells you there is such a thing as a “Safe Withdrawal Rate”, 4% or otherwise, do give them a wide berth – there is no such thing. Why? Because there are two big variables. The precise order of investment returns on your investments is unknown (sequencing risk), and how long you will live (mortality risk). 4% may be used as rough guidance, but a more nuanced approach must be considered when investing for ones retirement, and certainly wont be “safe” for all investors.
That’s off my chest.
Now to this extraordinary week, the week when Trump blinked.
Markets bounced very sharply on Wednesday on news of the 90 day reprieve for the more severe tariffs, excluding China. It was a classic bear market rally, suckers rally, which are typically the biggest daily gains in stock market history. By Thursday (as I write) the US markets have started tumbling again, and extreme risks persist. In Churchillian terms, the best case might be that we are midst the end of the beginning of the downturn.
A recession is now the base case for most economists, plus “an extended bear market in stocks” as Edward Harrison put it. This is a total reversal of their position at the New Year.
The markets vulnerability to a shock, and your portfolios vulnerability, depends on where you start. In 2024, did valuations tell us that there was a bubble, like 1929 or 2000? Yes. Did measures of confidence tell us that there was a mania. You bet, with expectations dangerously complacent. Today we are just starting to prick the bubble and unwind the mania.
Or look at this through the prism of confidence. Distrust of the US is deepening and broadening, reflected in the sharp falls in all US asset values, with the focus this week on “safe” US Treasuries. It is turmoil in the latter that apparently forced Trump to back down, at least for 90 days.
De-Americanising is not just taking place in financial markets. Tourist traffic to the US is down 13% compared to the same period last year. That’s a significant hole for US hotels and the broader tourist industry.
The FTs Richard Milne revealed that “many European companies” were questioning links with the US that had been in place for decades. One European director is quoted as saying “We are now discussing things that even a few months ago I would have said were beyond the realm of fantasy.”
Despite all of this, the S&P 500 isn’t down too much. Treasury yields aren’t (yet) very high. And the dollar and US equities remain richly overvalued.
For a sense of the person you are dealing with, like it or not, this from Orbis is excellent:
“The American poet Maya Angelou said ‘when someone shows you who they are, believe them the first time’ Investors would do well to heed that advice, particularly regarding President Trump and Treasury Secretary Bessent.
A selection of quotes from Trump:
‘There is a period of transition.’
‘I hate to predict things like that [recessions].’
‘Look, we’re going to have disruption, but we’re okay with that.’
‘There’ll always be a little short-term interruption.’
‘I’m not even looking at the stock market.’
And from Bessent:
‘There is no [Trump] put.’
‘There’s going to be a detox period.’
‘We’ll see whether there’s pain.’
‘Could we be seeing this economy that we inherited starting to roll a bit? Sure.’
‘Can you guarantee there is not going to be a recession? I can’t guarantee anything.’ “
So don’t get angry, because they have forewarned us.
Fundamental change is taking place across the globe, and there are multiple channels through which the next gut-wrenching unravelling can take place. Be prepared.
I am off to Dublin now. Next week I hope to have more detail on support levels for a range of markets, and a peek at goings on in the bond markets.