Investment market update

8 June 2022

Major asset classes continue to struggle

With inflation at 40-year highs in the US and UK and at a 60-year high in Europe, central bank policy remained front and centre of attention globally.

The ongoing war in Ukraine and further upward pressure on energy prices also cast a shadow over markets.

Shares continued to struggle against this background. In fact, the S&P 500 Index in the US has recorded the worst five-month start to a year since 1970.

Fixed income markets have also been hampered by evolving interest rate expectations. We need to go even further back in time to find a worse start to the year for bonds. US Treasuries, for example, have not performed as poorly in the first five months of a calendar year since the late-1700s!

Other asset classes have struggled too. After a massive 28.6% gain from their pandemic low – national average home prices fell for the first time since September 2020 based on CoreLogic data. The main driver of the downturn in house prices is the upswing in interest rates. Gold is down more than 10% from its March peak and cryptocurrencies have endured a torrid run; Bitcoin is down by a third since late March and has now lost around half of its value over the past six months.

What does the new Government mean for investors?

The ALP won the election and is set to Govern in its in own right. Following its loss in the 2019 election which was partly blamed on a “radical” tax & spend agenda, the ALP adopted a “small target” approach this time, so its economic policies are not significantly different to those of the outgoing Coalition Government. 

Labor’s macro policies not being significantly different from the Coalition’s and its victory not being a surprise suggests that the market reaction to the new Government will be minor and that investment markets will quickly move on to other things. So far that seems to be the case.

Reasons for optimism and key investment lessons

Central banks are talking tough on inflation, and markets are pricing in quite a few interest rate rises from here.  However, if central banks were to pause on rate rises earlier than expected, that would be a massive boost for share markets. 

Whether markets rise or fall tomorrow, or the next day, isn’t likely to materially affect long-term investment outcomes.  The stats tell us that if you look at the daily movements in the share market, they are down almost as much as they are up, with only just over 50% of days seeing positive gains. But if you only look monthly and allow for dividends, the historical experience tells us you will only get bad news around a third of the time. Looking out further on a calendar year basis, data back to 1900 indicates the probability of bad news in the form of a loss slides to just 20% for Australian shares.

And if you go all the way out to once a decade, since 1900 positive returns have been seen 100% of the time for Australian shares.  Key message: the less you look at your investments, the less you will be disappointed. This matters because the more you are disappointed, the greater the chance of selling at the wrong time.

Daily and monthly data since 1995. Date for years and decades since 1900.
Source: Bloomberg, RBA, ASX, AMP

It seems that these days there is always something for investors to worry about.  Good news doesn’t sell newspapers, so you’re unlikely to hear the positive outcomes long-term investing delivers.  Worries are normal around the economy and investment markets but most of them are just noise.  In order to grow wealth, having exposure to growth assets like shares and property is a must. This inevitably involves periods of volatility and patience is required to ride out the bumps.

The long-term view continues to support reasonable returns from investment markets.  The alternative of negative real returns from bank deposits remains unappealing for superannuants and long-term investors. 

Importantly, our message remains the same, remember our long-term strategy, stick to the plan and let markets do what markets do.

One of the benefits of having an Adviser is we are available when you need us. 

Please call the office if you would benefit from speaking to an Adviser about your investments at (03) 5224 2700.

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