Market Update - June 2022
We are in a BEAR market.
Australian shares are set to drop 4% today (14th June 2022).
This is on the back of heightened concerns that the US central bank’s efforts to check inflation with higher rates could lead to a recession, sparking a fresh rout in global equities.
As we continue to say, investment markets do not like uncertainty and there are a lot of questions around the Fed Reserves monetary policy and whether or not they will continue to front load the rate hikes to get inflation under control.
This week the markets are looking for guidance and certainty from Fed Reserve Chairman Jerome Powell, who has not filled investors with confidence over the past 12 months with his flip flopping.
The market ideally wants clarity on whether the Fed Reserve will continue to “Front Load” rate hikes, resulting in short term pain, with the view of getting inflation under control sooner. Alternatively, are we going to be in for some long term pain with smaller rate hikes resulting in inflation continuing to run.
The sharp drop in the Aussie markets, is a direct result of Australia enjoying a long weekend, celebrating the Queen’s birthday, with two days accumulating to the sharp decline today.
The Fed’s policy committee meets this week, with a decision expected early Thursday Australian time.
Many experts are predicting a 0.5-0.75% rate hike this week, with many stating “The Fed gains little by delaying the pain that everyone sees coming at this point. The biggest risk for the Fed is not doing enough to fight inflation. The board already made this mistake earlier this year. It should not stumble again.”
This is as the market has priced in another 287 basis points worth of increases are priced in over the next five Fed meetings.
Shares are not the only asset class to take a hit, with cryptocurrency assets plunging, with the price of bitcoin falling as much as 17% to its lowest level since December 2020.
In addition we are seeing movement in the property markets. We are seeing properties on the market for longer and vendors accepting discounts as they look to close out their sale before the next interest rate rise.
With each interest rate rise, buyers are re-rated, meaning they can borrow less and therefore offer less to purchase properties. This will continue to put downward pressure on property prices, however the full affect of the rate rises may not come into affect until late 2022/early 2023.
However, one investment expert has summed up the current market situation well, “This is a market that does not look like it is capitulating as much as it is frustrated.”
This coupled with the rising Volatility Index (VIX) or fear gauge, which has spiked to its highest level since 9th May 2022 at 35.05, indicates we are in for further volatility over the coming months, until certainty and confidence returns dissipating the frustration and fear of the unknown.
What is next
On Thursday we get some further guidance from the US Fed Reserve which should provide the clarity investors are seeking. (However, in saying that the last few times Powell has spoken the market has dropped). This may provide some relief to the markets, but we expect volatility to continue over the next few months with rising inflation remaining the biggest concern.
What to do
Every individual is different, having different goals, different investment timeframe horizons and also having a different risk tolerance.
Many of our conservative clients have had their portfolios rebalanced, to set them up for the volatility over the next 12-18 months. Including moving defensive parts of their portfolios away from passive index funds that are seeing large declines in the fixed income/bonds space as a result of rising interest rates, and also reducing the overall risk of the equities by considering long/short investment philosophies, whilst increasing their holdings to infrastructure investments to fight inflation.
Many of our growth clients understand that markets go up and down depending what is happening around the world, but more importantly they have time on their side.
*31 May 2022
Questions & Concerns
If you are concerned with your underlying superannuation investments or your personal investments, reach out to our team to organise a time to discuss your situation. We will look to understand your goals and what you are looking to achieve, so we can support you in building a strategy and construct a portfolio to get you to where you want to go.
Speak to our Newcastle & Lake Macquarie Financial Planning Advisers to discuss your options