Investors could be forgiven for looking back on the pandemic years of 2020 and 2021 with fond memories because after the initial shock in February-March 2020 it was a period of strong returns and relatively calm in investment markets. This year has been anything but.
After falling sharply into mid-June (at which point US shares had fallen 24% from their highs and Australian shares 16%), share markets rallied into mid-August, reversing half of their declines on the back of hopes the US Central Bank would pivot towards an easier monetary stance and hopefully avoid a recession. However, since mid-August through to the end of September shares fell again and were back to around their June lows. The current quarter has seen very strong returns from both fixed income and equities. Global shares jumped 7.2% in October and another 5.6% in November while the ASX200 rose by around 6% in both months. The bank sector alone jumped 14.4% in October, and November saw the utilities up 20% and materials (mining) up around 16% What a ride!
The drivers of markets are clear – expectations of a peak in inflation and interest rates in 2023, the US economy not yet falling into recession and the outcome of the US mid-term elections. In the UK, the new Rishi Sunak-led government delivered an infinitely more sensible fiscal statement than the one that shook markets in late September. Even the geo-political front has seen glimpses of positive news: discussions on how a negotiated settlement in Ukraine might come about; as well as some positive dialogue between Australia and China as part of the COP27 summit. Whilst a truce in Ukraine remains a long shot, if it were to emerge the Russians were giving up on Ukrainian territorial ambitions one might expect a significant positive reaction in global investment markets.
Whilst the drivers might be clear, the direction is less so. With inflation still being the primary cause of market volatility there may still be some interest rate policy decisions that markets react wildly to. The focus of central banks the world over remains on curbing the highest levels of inflation in 40 years. With that as a backdrop, recession related concerns for shares in 2023 will remain.
We don’t believe trying to predict what may (or may not) eventuate as a fruitful exercise for any investor. Try as one may, it is never easy to accurately predict economies, interest rate policy decisions and underlying share values. So, at times like these, it’s important to focus on fundamental investment principles. It is worth keeping in mind that share market declines are normal and they invariably bottom when most people’s fears are peaking. The key is sticking to your long-term investment strategy. Given inflation and interest rate changes is topical, we’ve provided more information in our article “What to do if interest rates go up”.