Worries about Omicron, inflation and interest rates have spurred a recent market volatility on Wall Street. Is this just another volatile period or the start of a more ominous breakdown? The answer is always the same: no one knows. But there are a few things we do know: there is no significant signs of an overall economic collapse or even sharp contraction.
Introduction
It once was a rule of thumb on Wall Street that January set the tone for the year. By that measure, the forecast for stocks in 2022 would be downbeat, and subject to wild swings.
Over the past two years, the market has defied the uncertainty of the world outside Wall Street. Stocks quickly recovered from declines in the early days of the pandemic and are now up more than 90 percent from their 2020 low. Many investors feared missing out on the seemingly unstoppable gains, especially in technology stocks and other risky companies, and piled in.
Recently, that feeling has given way to a growing concern that the stock investments may no longer be such a sure thing. Driving that worry, and the turbulence in January, has been inflation. More specifically, the concern is over how the Federal Reserve will fight stubbornly high inflation, which has been stoked in part by extensive emergency support provided by the Fed to bolster the economy during the pandemic, including cutting its key policy interest rate to near zero.
The US stock market is off to a choppy 2022
US shares have fallen 8% quickly, with the big technology names the hardest hit. Global shares and Australian shares are also weaker, falling about 7%. Triggering the recent spike in nervous market activity was the news that inflation in the US has accelerated to 7% and the increasingly likely scenario that the US Federal Reserve will raise rates as early as March to combat it.
The prospect of the US acting sooner and moving faster than expected has the markets currently on edge. Any attempt to aggressively extinguish inflation with multiple interest rate increases has many investors second-guessing what this means for economic growth, employment prospects, corporate earnings, and stock prices. At the same time, stimulus measures will be withdrawn throughout 2022, resulting in a reevaluation of excessive valuations in various sectors of the economy and share market (think property, discretionary leisure products and technology stocks, to name a few).
A broader outlook
However, there are a lot of factors at play, and recent market turbulence shouldn’t completely eclipse the very real signs of a healthy economy.
Whilst inflation and interest rates are dominating the headlines and keeping investors nervously on their toes, they have also been faced with a raft of other factors fueling a higher-than-normal level of concern and caution. For example, Omicron continues to persist, and the Chinese economy is slowing, and, most recently, global geopolitical tensions (Taiwan, Ukraine, Iran) are rising. So it is no surprise that with so much uncertainty simmering, investors are starting to get nervous, with some heading for safety.
Covid-19 has taught us all about the unpredictability of the future; however, we anticipate that many of the known risks we are currently facing should resolve themselves over the next 6-12 months. Our cautious but optimistic expectation is that inflation, a big concern right now, will be nipped in the bud once interest rates rise to more normal levels. This is due to happen shortly. Also, we think supply chain issues contributing to the rising inflation problem in the US and elsewhere are likely to ease as the pandemic, and its effects start to wane. With governments and central banks worldwide taking active measures to reduce inflation, we expect financial markets will sleep a little easier, and market volatility will fall away.
The Vogue Advisory Group perspective
As far as Vogue investment portfolios are concerned, we understand that recent market developments may be concerning. However, it is essential to remember that your portfolio is well-diversified and designed to insulate it from the worst of market volatility. It holds a diverse range of investments across multiple asset classes, investment styles and geographies. In addition, your portfolio is underweighted to inflation-sensitive shares and has low sensitivity to rising bond yields within its defensive bond exposure.
Remember, market volatility is nothing new. The last time we experienced significant volatility was in early 2020 with the arrival of the pandemic. Many unfortunate investors then sought the advance release of their superannuation and missed the significant recovery in markets soon after. Investors who remained focused on longer-term outcomes benefitted when markets quickly settled and resumed their upwards trajectory on the back of strong economic recovery.
We appreciate that episodes of volatility can be troubling. No one likes uncertainty.
However, we feel confident that your portfolio is positioned appropriately to meet its objectives, given the current market conditions.
To summarise
The key points to take away from this are:
This year has already been the worst start to a year since…forever (2009). Then again, it’s also only been a month. But a down year is not the end of times, or the sign of a massive bubble, and in truth, if bubbles are what one is looking for, with those few thousand names that have cratered in the past few months, the bubble has already burst.
Nothing in the real world suggests an imminent problem of major proportions. War in Ukraine could certainly be another shock; a new COVID-19 variant could be as well. But unless and until credit markets start to breakdown or employment sharply erodes or inflation truly gets out of control, these market moves are as incidental as some of the moves up were last year. And none of the reasons for this self-off preclude a climb back given such robust real-world dynamics. Above all, in times such as these, beware those who speak with oracular certainty. The world is far too fluid to be so simply predictable.
Vogue Advisory Group – using our knowledge to assist our clients with any questions or concerns
If you require any assistance related to recent market volatility, please contact us directly.
The Vogue Advisory Group helps our clients with all aspects of their financial position. Whether it’s for lending, investments, cash flow & taxation, or retirement planning.
Our team’s focus is to help our clients achieve their financial objectives in a professional yet educational process, so our clientele understands what is involved in achieving their goals.
