Equity markets in 2022 have started on a sour note with markets down between 10% and 14 % now. Headlines always exaggerate the negative but it pays to remember that what goes up must come down and also vice versa. Markets are taking a breather from double-digit positive returns in 2021. Tech index and many growth stocks had gone up beyond the values they generated and, therefore, a correction was always on the cards at some point in time. Question remains whether this is where the bottom is or is there further downside yet to come?
Let’s look at the reason for the recent declines:-
- Inflation has run ahead of expectation of central banks, especially in the US where inflation is running at 7% .
- Given the rampant inflation, central banks around the globe are looking at pulling back the stimulus and increasing interest rates. This could dampen economic growth and put equity valuations at risk.
- Covid off course is causing both inflation run ups due to constraints in supply of goods as well as labour shortages, not to mention business closures and restraint of trade due to supply chain disruptions and border closures.
- Geopolitical tensions from the fear that Russia will advance on the Ukraine and China will do the same with Taiwan. The US could be dragged into a long skirmish on these border disputes when it can ill afford the expense causing equity market volatility. Off course, this is a wait and see on how it plays out.
Market corrections are both normal and healthy. We would rather have small and regular corrections than have the markets continue to run up unabated and then experience a large correction that takes everyone by surprise. For example, during the Tech Boom between 1995 and 2000, the US market had 7 pullbacks ranging between 6% and 19%. During that same time frame, the Australian market had 8 pullbacks ranging from 5% to 16%.
Source: Bloomberg, AMP
What is most important to keep in mind is that, despite repeated pullbacks over all share market periods, the trajectory is generally up over time. Equity markets reward the patient and move up as human endeavour is always geared towards progress. The price we pay for this longer-term growth trajectory is the volatility we must stomach.
Source: ASX, AMP
There are also positives that need to be countered against the negatives as there are always two sides to a coin. Let’s have a look at these:
- Covid cases, despite the Omicron virus spreading more rapidly although with less severity, in the US, Europe, and Australia is slowing due to the increase in vaccination rates. This should provide some comfort to people that perhaps the risks are now far less and this should result in improvement in business conditions and consumer sentiment.
- Savings in the US, Europe, and Australia has accelerated during the covid era due to lack of movement as well as lack of supply of goods to spend on. The US has excess savings of approximately US$2.3Trillion whilst this figure is $250Billion in Australia. This should provide an economic boost to spending in the respective economies over the coming 12 to 18 months.
- Tightening of monetary policy (increasing the interest rate) is, we believe, going to be gradual and measured. Rates are at historic lows and will remain low compared to historic rates for some time yet.
- On the other hand, China is easing monetary policy to boost its economy which provides a positive backdrop to the rest of the world, especially Australia given they are our largest trading partners.
- Inventories are low due to factory shutdowns, shipping backlogs, etc. This will need to be rebuilt, providing a boost to production.
- Growth projections globally are still strong, albeit slowing from last year. Therefore, as covid impact is reduced and production, supply, spending, and trade expands, there are positives yet to play out.
Patience in investing creates longer-term wealth as selling out when markets correct simply crystallizes the loss with no opportunity for a recovery. We take a longer-term view on markets but ensure that the underlying exposures are both sound and of top quality. Quality stocks and investments will still fall with market movements but they will recover quickly and, as long as we stick to our longer-term investment strategy, continue to provide growth. These are times to look at opportunities and stay the course.
“The stock market is a device for transferring money from the impatient to the patient.”