BY CRAIG MCAVINUE – DECEMBER 2ND 2022
“There is nothing more certain and unchanging than uncertainty and change.”
For the first time in 2022, the markets had back-to-back monthly gains, with the S&P 500 repeating its October performance of clawing back over 5% of its 2022 losses to date.
Data table is from Google Finance
A negative USD often follows positive results in markets, as parking cash seems less attractive than buying undervalued shares.
Data table is from Google Finance
The “elephant in the room” since the final post-COVID financial stimuli has always been inflation. Cost of living increases have been at their highest since the 1980s. With little to no wage increases and much of the previously cheap debt becoming more expensive, the potential for another financial crisis has been looming for months.
Yet September and October inflation figures show that the Federal Reserve’s policies have been working. At 7.7%, the year to date rate is back to where it was at the start of the year and quite far from its June high of 9.1%.
Also, for the first time, Federal Reserve Chair Jerome Powell put a number – 5% – on peak interest rates. Previous estimates had been uncertain, with 6, 7 or even 8% being thrown around. All of this is positive news for the stock markets.
The one factor that markets hate more than anything else is uncertainty. Unfortunately, 2022 has had this in abundance. Indeed, the world has been wrapped in this high level of uncertainty since January 2020, when we first heard the words “COVID-19.” A war in Ukraine followed, with political turmoil in some parts of Europe and disrupted supply chains, but all are ultimately just contributory factors to the core problem of inflation.
Where would inflation peak, how long will the Ukraine conflict last, can China really stick by its zero-Covid policies, will Covid come back or morph into something different? The questions and the level of uncertainty were at their highest since 2008.
But this morning, the outlook seems a lot more optimistic. Of course, nothing is certain and only a fool would suggest we are completely out of the woods and can now look forward to nothing but another ten-year bull market. We still have the situation in the Ukraine, and while its end date is of course uncertain, we have kind of gotten used to it. China seems to be finally realising their zero-Covid policy is unsustainable. Inflation is, dare we say it, under control. Covid is largely behind us. In my home country of Thailand we recently saw visitor numbers return to pre-2020 levels.
As I mentioned in a previous blog, over US$10 trillion had been wiped off of the S&P 500 in 2022. This is an enormous amount of money. But while many held the view that the last 14 years of printing money is only leading us toward financial Armageddon, US$10 trillion accounts for around 40% of the US quantitative easing measures Now that we’re seeing actual growth, dare we believe that some of these economic policies may just be working out?
Markets are inherently volatile and the next six to 12 months are likely to see more of the same. Emotions drive this and they are always overstated.
A name few of you will recognise but as a British football fan, and one who supports West Ham United, I know well the name Iain Dowie. He was something of a folk hero as a player and manager in the 1990s and 2000s. Despite not being blessed with the best looks and sporting a rather mundane goal scoring record for a centre forward, Iain’s post-match interviews were the stuff of legend.
During one interview as manager of Crystal Palace, Dowie became one of very few people who invented a word that was adopted by the Oxford English Dictionary. He described his team as having “bouncebackability.”
However, in times of volatility it is usually the active managers who are better positioned to achieve growth. They can hold cash, identify sector and geographical opportunities instead of just being carried along with the market as a whole.
For all those firmly in the passive camp, there is also an active passive option. ETFs provide the passive aspect, but you can decide which sectors to buy into.
More thought and guile is required in these testing times. Major influences like inflation, interest rate increases, the housing crisis are still very much a part of the challenges we may face over the coming months. There is still profit to be had, you just need to know where to find it.
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