Key Summary Points:
- Stock and Bond Markets have fallen dramatically this week, continuing the trend since the start of 2022.
- High inflation in the U.S. was the cause – coming in at 8.6%. The highest in 40 years. This prompted the U.S. Federal Reserve to raise interest rates by 0.75%. Domestically, the RBA raised rates by 0.5%.
- The Inflation is being caused by a range of factors, including supply chain disruptions due to the COVID crisis and the war in Ukraine.
- Investors fear that rising interest rates, to combat inflation, will hurt economic growth and cause a recession.
- Fear of slower economic growth has hurt the share market, which performed strongly in 2020 and 2021.
- Stocks market and Bond market falls means they are now more attractively priced.
- It is important to take a long-term view and stay invested, with diversification, in line with your risk tolerance.
- Time in the market, is more important than timing the market.
The chart above shows the recent dramatic increases in U.S. Inflation with the colours reflecting where the inflation has come from – mainly from energy prices, services and food.
The COVID crisis and the war in Ukraine caused reduced supply of goods and services. Also, just after the COVID crisis back in March 2020, governments and central banks increased the money supply to support markets and economies. The increased money supply, meant more money bidding for the same quantity of goods, causing rising prices. This will likely continue throughout 2022, as it takes time to work through the global economy.
We expect inflation and interest rates to continue rising in 2022. This will have an effect in the short-term, dampening economic growth. We also expect inflation to reduce in 2023 and this should take pressure off the global economy. This is because the supply side shocks should reduce as the world opens up after the COVID crisis.
An end to the war in Ukraine would also help the inflation situation, as the supply of many key commodities would increase.
Markets have fallen substantially and are therefore more attractively priced than recent all-time highs at the end of 2021. There are asset classes that should do well in the coming periods, including floating rate Bond markets and asset classes that benefit from inflation – e.g. Infrastructure and Commodities.
One of the important lessons in investing is that time in the market, is more important than timing the market. The following chart demonstrates that whilst short term movements in markets (in this case the ASX 200) can be extremely volatile (as we have witnessed in the past six months), investing for the longer term (the blue line) provides a much more stable outcome. As we continue working through this period of heightened volatility, keeping the longer-term in mind remains important.
Authors: – Alex Harris & Ross Stanley (Research Analyst), Andrew Ash (Senior Manager)
Approved By: – Matt Olsen, Head of Research and Retirement Income
Research Analyst Disclosures:
I, Alex Harris, Ross Stanley and Andrew Ash, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject investment theme and/or company securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
I, Alex Harris, Ross Stanley and Andrew Ash, and/or entities in which I have a pecuniary interest, have an exposure to the following securities and/or managed products mentioned in this report: Nil
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