Firstly, a very Happy New Year to you all, I do hope you had a less constrained and consequently more enjoyable Christmas and New Year break than last year.
As January draws to end, I just thought I would write a few lines of comment on the volatility we have seen in markets since the beginning of the year.
To give you an idea of what has been going on I have included some charts below. I have used the S&P 500 Index in the US to demonstrate, as it has been one of the worst affected markets.
This first chart takes a look at what has happened to the S&P 500 Index since 1st January 2022, up until the close of business last night:
These are quite sharp falls and inevitably this has taken the shine off some the rapid recovery we have since the worst days of the pandemic; so what has been going on?
Well, there are a number of headwinds battering the markets at present and when we look at these, recent market falls become a little more understandable. I will summarise the key factors below:
Firstly, we have been experiencing a significant uptick in inflation across the world, as global economies emerge from the pandemic. As an example, that you have probably spotted in the news, the latest CPI figure for the UK is 5.4% per annum, set against a Bank of England target of just 2.0% per annum. Higher inflation was perhaps inevitable, as supply chains that were wound down during the pandemic take time to spool up; not only are supply chains struggling but consumers are sitting on significant levels of cash (money they haven’t been able to spend over the past 2 years), which is now being deployed in the economy, creating the classic ‘too much money chasing too few goods scenario.’
It is not necessarily inflation in itself that is having an impact on the markets, it is more the expectation that the way central banks will attempt to combat it will be through the use of higher interest rates and a reduction in market support through quantitative easing (QE). This potentially makes it more expensive for firms to service their borrowing and restricts their ability to expand, all at a time when they are trying to get back on their feet following the pandemic. Some of the volatility, particularly in US markets, has been caused by concern over what the US Federal Reserve might announce regarding interest rates and a reduction in QE, at their meeting later in the week. The expectation is that an interest rate rise will be announced in March and the tapering of the reduction in QE will be accelerated, and markets don’t like this.
In addition, President Putin has amassed what looks suspiciously like an invasion force on Ukraine’s lawn and this is causing a great deal of global tension. Assuming he does invade, what will the response be from NATO and how will this affect stock markets? It seems unlikely that troops will be sent in, the response is more likely to be coordinated sanctions and the question then becomes, what will Russia’s reaction to these sanctions be? Will it weaponise its gas supplies, restricting or even cutting off supplies to Europe? This uncertainty is weighing on markets but as the resolution of these tensions is unlikely to involve global conflict, it is questionable by how much.
Finally, we have a significant sell-off in tech markets (almost all major tech companies are listed in the US) as earning expectations fall, as we emerge from the pandemic. As an example, the rate of increase in subscriptions for both Netflix and Peleton did not meet 3rd Quarter expectations (not by much) and their share prices fell immediately by approx. 20%! It could be argued however, that this 20% fall is just some of the froth being wiped off the top of valuations, following amazing years for both of these companies – can’t go to the cinema, I’ll sign up to Netflix – can’t go the gym, I’ll subscribe to Peleton; the pandemic wasn’t bad for everyone!
Having looked at the causes behind the volatility, how worried should we be and what does the future hold? The short answer (as it always is), is I don’t know and neither does anyone else! A longer answer involves looking at these falls in a longer-term context. The following chart shows the S&P over the past 12 months:
The recent sell-off is clearly significant but it is not catastrophic and it certainly does not constitute a crash (yet), when looked at over a 12 month period.
If we look over a full 5 years, just to make sure we include the major falls that occurred early in the pandemic, recently volatility is put into its proper perspective, see below:
Falls of this type are not unprecedented, we have seem them before and we will see them again; over even longer time periods these corrections can be described as part of the normal market cycle.
The advice, as always during these periods of uncertainty, is to sit tight if you can and ride out the storm, markets have always recovered from even the biggest crashes but sometimes we have to be patient. The most important thing to remember is that falls in your portfolio are not ‘real’ unless you sell, if you can hang on, you are likely to lose nothing and hopefully earn a decent, inflation beating return.
I hope I have been able to provide a little bit of reassurance, but if you are concerned and you feel that a chat would be helpful, please do not hesitate to call, there is nothing I like more than speaking with my lovely clients!
Rest assured, further Round Robin e-mails will follow, as things develop.
Wishing you and all those you care about, all the very best for the rest of 2022.
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
