Stocks can indeed go down as well as up

Some investors seem to have forgotten that stock markets can fall, says Merryn Somerset Webb. They've just had a reminder.

Until Tuesday, the US stockmarket had gone 109 days without a fall of more than 1%. On Tuesday the S&P 500 fell 1.2%. Oh, said one investor on Twitter: "so stocks can go down as well as up?" Indeed they can. And this is exactly the kind of time when they do. The last eight years have been all about falling interest rates and rising stockmarkets to the point where it is hard for most of us to imagine anything else. We should.

As Robin Angus, the chairman of Personal Assets Trust, points out in his latest letter to shareholders, a great question to have asked yourself 30 years ago would have been what a world in which US ten-year Treasuries yielded 2.3% would have looked like. No one asked that question, since "to have done so would at that time have seemed as detached from reality" as asking ten years ago what a US run by Donald Trump would have looked like.

Fast forward to today and the thing that seems most mad is not to speculate about historically low rates, but to wonder "about the possibility of a world in which US ten-year Treasuries may again yield 14%". Still, mad or not, that development is worth wondering about.

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It would be awful for debtors. It would be bad for any long-term bonds (and those who invest in them think your pension fund) and pretty bad for the bond proxy stocks (blue chips with steady yields) that so many fund managers are still clinging too. But it is also a real risk.

Interest rates at 14% might be some way off, but there is plenty of evidence to suggest that 4% isn't. Inflation is rising all over the world: the latest numbers in the UK have it at 2.3% at a time when our base rate is only 0.25%. It's also worth remembering that unpredictable politics are often a driver of inflation and that the world looks deeply unpredictable at the moment.

This may not cause much immediate market trouble in places where stocks are cheap. But it will where they're already horribly overpriced. In the US stocks trade on an average trailing price/earnings ratio of 25 times and the best you can say about that is that they aren't quite as expensive as they were in 1929 and 2000. The good news is that not everything is quite so off-putting.

In our cover we look at how to benefit from the fact that the UK houses some of the best research universities in the world. Until a decade or so ago we were hopeless at finding ways to commercialise that. Now we are getting much better. But before you rush out to buy anything, in this week's issueMax King adds another fund idea into the mix. Thenturn to the markets page for a look (again!) at the merits of investing in the Japanese stockmarket. The US is expensive and politically volatile. Japan is not. Given that stocks can go down as well as up, which would you prefer to hold for the next five years?

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.