Given the heightened volatility in investment markets in recent days, we feel it’s appropriate to provide a fresh update and some perspective.
The past week has seen increased selling across most asset classes following higher than expected inflation data both in the US and other major economies. On Friday, US headline inflation was 8.6% year on year, whilst the more closely watched core measure rose 6.0% - the highest in forty years.
The US, European, UK and Australian central banks are now rapidly raising interest rates to get inflation under control. High or uncontrolled inflation can cause major economic and social issues, in particular for middle and lower income households who spend a larger share of their income on necessities like food, housing and utilities. They often have less wiggle room in their budgets, and can struggle to meet their basic needs in a high inflationary environment.
As a result of a more rapid interest rate hiking cycle than anticipated, we are generally seeing lower asset prices being the accepted casualty in the process. The US market (S&P500) has fallen by 22% since the start of 2022 and has now entered into a technical bear market for the first time since the Covid-19 downturn in early 2020. The Australian share market (All Ordinaires) is down 12% for year. Our economy is driven by resources, commodity prices and financials which has enabled our market to be a little less sensitive to the changing interest rate environment.
In the short-term, markets will likely continue to be volatile, moving aggressively both up and both with economic data and the evolving sentiment of investors. Corrections on investment markets are an inevitable part of the investment journey which is why the majority of your investment conversations with your Financial Adviser will centre around investment behaviours and expectations, as investors who don’t manage these well often see a downturn as an exit point – which almost certainly locks in losses and ensures they miss the inevitable bull market that follows. For those with long-term timeframes, well-set expectations and available cash, a market downturn is always an opportunity. It doesn’t feel that way to everyone in the moment which is often characterised by increased uncertainty, but when we look back at previous market corrections and crashes, hindsight always points this out to us.
For perspective, we have included S&P500 charts for the period of six months, five years and forty years.