Nearing the bottom? Or just getting started?

Work has been crazy the past few months (seeing people in person again has it’s pros and cons!), which has limited my writing, but also the attention I pay to the markets. That’s typically a good thing anyway – hence Bogle’s timeless advice to “don’t just do something, stand there!” Just been doing my monthly portfolio updates, checking on rebalancing a little more frequently, skimming through Monevator’s always-excellent Weekly Reading, etc.

But a chart posted on, of all places, Reddit’s WallStreetBets, caught my eye. Not sure of the original source (happy to add sourcing if anybody knows – I haven’t 100% confirmed the information either, but a few spot checks look right):

Smoothing out all the volatility shows why this pullback is very different from 2020 (sharp, severe, but blink and you missed it), and not nearly as painful as 2007-08. At least, not yet, although we’re on roughly the same trajectory.

What’s been remarkable to me is how badly bonds have done, along with equities. Intermediate term gilts and total US bond market are both down about 10%, S&P 500 is flirting with 20%, FTSE 100 is basically flat (although the rapidly weakening sterling hides reduced real purchasing power in a flat nominal value). Plenty of individual stocks, especially tech ones, are down way more than that – 50% plus:

https://theirrelevantinvestor.com/2022/05/17/where-are-we-in-the-cycle/

But, like every pullback, this one is unique. A combination of factors I’ve certainly not seen in my investing life:

  1. Inflation, now approaching double digits in the US and UK
  2. Rising interest rates, after falling fairly consistently for 40ish years
  3. A tech bubble, driven by easy money and a COVID-inspired optimism about tech that seems to now be deflating
  4. Very tight labor markets, which may drive inflation up more, and certainly are challenging many low-wage employers to find workers at all. Even higher wage employers (including mine) are struggling to hire for prices they think are “reasonable”, and to retain good people.
  5. Supply chain issues, from COVID and the cheap labor shortage.
  6. Russian aggression in Ukraine and the threat of great power conflict

All that combines to make for a volatile investing environment, and an uncertain future. Despite the title, I don’t have any more of a clue if we’re at the bottom than anybody else. Look back to the first chart – there are plenty of pullbacks of similar severity that end soon. But there are also some examples where we’re less than a third of the way through, in both duration and severity.

If I had to guess, I’d say it’s not over yet. Probably the worst of the tech bubble blow-off is done, although I expect some isolated further examples. But it feels like the broader impacts on non-tech are still coming to light. None of the other factors I mentioned are done: inflation is still going up, not down. Interest rates are still very low, although rising. There’s not a clear path back to cheap labor – which might be a good thing for income equality and broader societal stability, but has ripple effects on prices. COVID remains an issue, especially in China but likely to pop up unexpectedly elsewhere. And it’s anybody’s guess how Ukraine plays out.

So what should we do about it?

Nothing. At least, that’s what I’m doing. My pension investments continue every month. I moved money into our ISAs in April, and rebalanced to bring my stocks vs fixed income split back to balance. And I’m checking my rebalancing bands, but I’m currently only 1.6% under on stocks/1.6% over on fixed income. There’s a part of me that wants to trigger a rebalance at that level, rather than waiting for 5% – doing some research there.

But aside from that, I’m doing nothing. Not trying to sell out into cash to time the bottom, of course. Not chucking more money in, because there isn’t any “spare” money – I wasn’t keeping spare cash laying around. Thought about some tax loss harvesting, may do a bit of that if we keep going down, but at this point very little of my investments are outside some kind of tax shelter.

There’s the naughty stockpicking part of my brain that wants to do a bit with my “fun money” allocation – Amazon and Moderna in particular look oversold to me. I may yet pull the trigger on small bets here, keeping my fun money well under 5% of my portfolio. Those are both companies I’m happy to buy and hold for a very long time, and if a little fiddling around the edges keeps me from anything bigger, that’s a good thing.

I’m feeling rather pleased about my approach to bonds and cash. Because only a tiny part (2%) of my portfolio was in marketable bonds (all UK gilts in my pension), the bloodbath in the bonds market hasn’t touched me. My true cash (savings accounts and Premium Bonds) are losing money to inflation rapidly, but haven’t lost anything nominally, and rates are creeping up.

The TSP G fund has been a relative star – rates rising with long-term treasuries, so now up to 3%, with no capital loss. Still not beating inflation, but a lot better than being down 10% in a “normal” bond fund. I bonds would be even better, but I haven’t taken the plunge there, not because they’re in any way bad, but just enough bits and pieces that I’m not sure they’re worth the faff, for me ($10k limit, TreasuryDirect is archaic, UK tax on the interest, time limits on withdrawals, etc.).

Back to the office?

One other big factor that I think will have major impacts on both work/life balance and company performance over the coming years is their approach to remote work. For context, pre-pandemic I was an in-office worker, but my company had started experimenting with one or two days a week from home, largely due to office and parking space constraints. Coming out of the pandemic, I’m in a 100% remote role (with some travel, but my work isn’t associated with any specific site). But much of my company is manufacturing or lab based, and thus is almost 100% on-site, and has been through the pandemic.

My conjecture is that white-collar, knowledge-based work is going to split companies into five buckets:

  1. Dinosaurs that insist everybody is back to the office 100%. They may get good collaboration with that brute force approach, but they will struggle to hire top talent. Every high performer I know wants some level of flexibility, and I think it will be a major disadvantage in hiring to insist on 100% in-office work.
  2. Rigid Flexibility: “2 days a week from home, 3 days in the office” and similar schemes. Pays no attention to what is going on those days, so you get people driving to the office just to sit on video calls, and then trying to collaborate remotely. Especially fun when you have a group meeting, but only half the group is in the office, so you wind up huddling around a little speaker trying to talk to the rest of the team, or just carrying on without them and the people on the call are lost. Not actually much better than the dinosaurs, although leadership may think they’re well ahead.
  3. Truly Flexible: make the office the place for collaboration, brainstorming, personal interactions. Make the most of the time people have in the office – trust people to do the right work in the right environment. Collaboration, training, mentoring, networking – all usually better in person. Day-to-day work – probably anywhere. Focused creative work – depends on the person and the environment, some will be better at home, some in a specific space in the office. And so on.
    • I’ve just spent a week in a face-to-face workshop. In two weeks, we achieved more mutual understanding and agreement on a path forward than we did in the last two years. Clear value for money/effort, even with a chunk of international travel involved.
  4. Broken Remote: broken might be a harsh word, but this is what a ton of companies have been forced into during COVID. The day-to-day work mostly happens alright, sometimes with more friction than in person. But the collaboration, training, coaching part is far less effective, or it just gets skipped because it’s hard to do remotely. Companies can sustain this model for a long time, but they will stagnate – becomes very hard to get new ideas to move forward, very hard to develop the next generation of leaders, general malaise. Some companies will try this, thinking they’re keeping up with competitors by being remote, but it will slowly emerge as a negative differentiator.
  5. Remote Nirvana: this is the one I’ve never seen (I’ve lived all the others), but I am assured it exists. These are companies that truly make remote work as well or better than in-person. Lots of asynchronous communication, not so much staring at video calls. Practices that encourage collaboration and personal relationships, even across geography and time zones. I can’t tell you how to get there, but for the few companies that really make this work, it will be a huge advantage.
    • This probably also only works for a small subset of potential employees. It may well be that some companies make this work, but the pool of people they can hire is so limited it can only ever remain a niche model. We’ll see…

It’s clear to me that there’s no one model that works best for every company and every employee, although Truly Flexible and Remote Nirvana are obviously better than Rigid Flexibility and Broken Remote. It will be really hard to tell, as an investor or a potential employee, which bucket a company falls into.

Dinosaurs are easy to tell, and that’s the only bucket without a good/bad version – it’s all bad. But maybe that’s my bias, and maybe there are environments and cultures where 100% in-person is the best way. I’m not convinced though – there may be situations where 100% in-person is required, even for knowledge workers (dealing with highly classified information, for example), but that doesn’t mean it’s the best way of working, only that it’s necessary based on other factors. For everybody else, the complete lack of flexibility will drive away top talent.

It will definitely be an interesting few years as businesses figure this out, balancing collaboration, productivity, retention, mentoring, and so on. I expect there may be some opportunities for active investors – or better yet, stay the course, own the market, and let the winners rise to the top.

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