Volatility is Normal

The volatility that we’ve seen over the last six months, while significant, is not an unusual occurrence for a normal and healthy functioning market. Heightened volatility is an uncomfortable experience in the short- term.  Equity markets and some parts of the bond markets will continue to be an important contributor to overall long-term returns.

We appreciate that the current environment looks concerning given falls in markets and likely further interest rate rises during 2022.  With the possible risk of recession, however it is important to continue to stay invested.  Manage your portfolio in line with your long-term objectives, aligned to your risk tolerance. We encourage investors to discuss their portfolio with their adviser to ensure that it meets their personal needs, objectives and is in line with their risk tolerance.

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 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.
• 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.

Inflation at 40-year highs

The chart above shows the recent dramatic increases in US 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, 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.

What’s ahead?

We expect inflation and interest rates to continue rising in 2022. This will have an effect in the short-term, slowing economic growth. We also expect inflation to reduce in 2023 and this should take pressure off the global economy. This is because supply side shocks should reduce as the world opens up.

An end to the war in Ukraine would also help the inflation situation, as 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.  That is, 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 short term movements in markets (in this case the ASX 200) can be extremely volatile.  This is what 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 heightened volatility, keep the longer-term in mind.

Long Term Returns (Blue Line) More Stable than Short Term Return (Green Line)

If you’re worried about your personal situation, give the Wealth Planning Partners team a call on 07 5593 0855 to chat further.

Disclaimer

The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the advice contained in this document, you should assess your own circumstances or seek advice from a financial adviser. Where applicable, you should obtain and consider a copy of the Product Disclosure Statement, prospectus or other disclosure material relevant to the financial product before making a decision to acquire a financial product. It is important to note that investments may go up and down and past performance is not an indicator of future performance.

The contents of this report should not be disclosed, in whole or in part, to any other party without the prior consent of the IOOF Research Team and Advice Licensees. To the extent permitted by the law, the IOOF Research team and Advice Licensees and their associated entities are not liable for any loss or damage arising from, or in relation to, the contents of this report.

For information regarding any potential conflicts of interest and analyst holdings; IOOF Research Team’s coverage criteria, methodology and spread of ratings; and summary information about the qualifications and experience of the IOOF Research Team please visit https://www.ioof.com.au/adviser/investment_funds/ioof_advice_research_process