Investor optimism is in desperately short supply right now. As the war in Ukraine drags on, inflation rockets and recession fears grow, the mood is downbeat and deteriorating.
With the headlines warning of soaring energy costs, interest rates, recession risks and company closures, investors could be forgiven for selling up and lying low for a year or two, but they shouldn’t.
There is some positive news out there, if you look hard enough.
This year has brought misery for the bulls yet the bears risk overdoing the gloom, David Morrison, senior market analyst at Trade Nation, says.
Today’s situation is nowhere near as bad as the 2008 global financial crisis, which brought the banking system to the brink of collapse, and the Covid-19 pandemic, a killer virus with no vaccine that triggered lockdowns globally.
The biggest fear investors face today is that the US Federal Reserve will increase interest rates too rapidly as it looks to combat inflation.
“I don’t believe pushing the Fed funds rate to 2.5 per cent or 3 per cent will lead to a stock market crash, or even a protracted bear market,” Mr Morrison says.
US share prices are already adjusting to the new reality and undergoing a healthy correction.
“A recession cannot be ruled out, but once economists have the numbers to prove we’re in one, stock markets will have already bottomed out and started to recover,” Mr Morrison adds.
There are signs that investor bearishness may have already peaked, says Vikash Gupta, chief executive of London-based asset manager VAR Capital.
US inflation hit 8.6 per cent in May, but that is only a fraction above March’s figure of 8.5 per cent, so the rate of growth is easing, while yields on 10-year US government bonds have slipped from 3.2 per cent to 3.04 per cent.
If the Fed does ease the pace of rate hikes as a result, “investors could become slightly more constructive on markets”, Mr Gupta says.
The US could still avoid a serious downturn if inflation continues to moderate and consumer spending remains resilient, Devesh Mamtani, chief market strategist at Century Financial, says.
“US retail sales climbed in April, in a sign that its economy still has vigour, while the unemployment rate held steady at 3.6 per cent, with solid wage gains,” he adds.
The economy is nonetheless slowing, but this cooling off could ease price pressures. For example, lumber prices have now halved as the housing market slows.
Commodity prices are also receding to normal levels, Mr Mamtani says.
“Wheat is down 16 per cent from its May highs, soybean meal has fallen by 14 per cent since its March high and Coffee Arabica has plunged 10.5 per cent since February, indicating that food inflation might be past its peak.”
The US economy may still be on course for a soft landing as hopes grow that the Fed can tighten without tipping the country into recession, Mr Mamtani says.
“Though the cries of a recession are growing louder, the economy's fundamentals are strong and any downturn could likely be mild."
While some businesses are struggling, those with strong brands and pricing power will able to pass on higher costs to consumers, Kareem Rathore, partner and financial adviser at Hoxton Capital Management, says.
“Due to extended Covid lockdowns, consumers also have a greater cushion of savings, helping them cope with the cost-of-living crisis.”
Stock markets have already priced in upcoming interest rate hikes, which can hardly come as a shock, Mr Rathore says.
“After recent falls, there are lots of attractively valued companies, which is a potential buying opportunity for investors.”
Investors can turn stock market volatility to their advantage either by buying on the dips or investing regular monthly sums.
That way, they can pick up more stock when prices are down and benefit when they recover, Mr Rathore says.
There are even grounds for optimism in the UK, which has become "a global poster child for soaring prices and weak economic growth", Ben Laidler, global markets strategist at social investment network eToro, says.
Unemployment is near a 50-low of 3.7 per cent and London's FTSE 100 index of blue-chip shares is the world’s best-performing major stock market this year, he adds.
Companies listed on the index generate three quarters of their earnings overseas and have benefited from sterling weakness. They also pay generous dividends, a reliable income stream that can act as a hedge against inflation.
There are silver linings in every situation, Mr Laidler says.
“Slowing economic growth will cut inflation, which will allow the Bank of England to step back from hiking interest rates, and support a sustainable recovery.”
The UK should tempt overseas investors right now, according to Dan Dowding, director of wealth management at Patronus Partners.
“Its stock market has significant exposure to commodities and consumer staples, which are inflation-resistant, and have benefited from a weak sterling relative to the US dollar.”
Despite Prime Minister Boris Johnson's troubles, unemployment is low, job security high and the housing market looks robust, growing 10.5 per cent in the year to May, according to UK bank Halifax.
“The rate of house price growth may moderate, but we don’t envisage a correction,” Mr Dowding says.
Meanwhile, history suggests that the best time to invest is when people are at their gloomiest, although it never feels like it at the time, says Jason Hollands, managing director of Tilney Investment Management Services.
“We are braced for so much bad news that even modestly positive developments would be well received.”
One ray of light is that China has started to exit its Covid-19 lockdowns.
“China is the world’s key manufacturing hub and increasing factory output will help ease today’s supply chain concerns and inflationary pressures,” Mr Hollands says.
Unemployment is low, especially in the US where there are two job vacancies for every person out of work.
“The most recent corporate results are also encouraging, with companies reporting record profit margins and relatively healthy balance sheets.”
Shares remain one of the best ways to protect your wealth against inflation, which should help maintain investor demand, Mr Hollands adds.
As investors flee risk, Bitcoin has taken a beating. It has crashed from $67,734 last November to below $30,000, yet even here there are positives as transactions break new records, Katharine Wooller, managing director at crypto wealth platform Dacxi, says.
“Blockchain technology is thriving and the seeds of the next crypto boom are being developed. Long-term crypto holders who can ride out the current economic storms are sitting pretty.”
Garry White, chief investment commentator at Charles Stanley, says: “As the old saying goes, it’s always darkest just before dawn.”
Even if the worst happens and major economies fall into a recession, it may not mean the end of the world.
“Banks are well-capitalised and companies are, in general, cash-rich with strong balance sheets, so we are unlikely to see a credit crunch,” Mr White says.
Naturally, this is just one side of the story. It would be easier to draw up a long list of negatives, but it's worth highlighting the positives, too.