Market uncertainty and long term investment

As long-term investors we regularly experience periods of market weakness, however, the first half of 2022 has proved to be one of the most challenging on record: for instance, the main US stock market (S&P 500) has just had the worst 6 month start to a year since 1970.  There have been few places to hide this year, with both stock and bond markets falling to levels consistent with a recession as inflation has remained stubbornly high which has led the market to be more concerned about how far and how fast the Central banks will be forced to raise interest rates.

A culmination of factors have made 2022 a difficult year for investors and contributed to high inflation:

  • supply chain problems – countries have re-emerged from Covid at differing speeds – demand for goods is high but many factories around the world are yet to fully re-open, so supply has not kept pace with demand
  • global staff shortages – millions have left the workforce after Covid, with some choosing to retire early and others seeing the pandemic as an opportunity to reassess their work-life balance and reduce working hours or switch industry
  • China Covid lockdowns – in April this year, China is reported to have had over 300 million people in Covid lockdown, across 45 cities, as President Xi pursues a ‘zero Covid’ approach – things may seem more like ‘normal’ in the UK but that is not yet the case for much of the world
  • the war in Ukraine has restricted the supply of much needed energy and commodities to the global market, not to mention the great suffering caused and significant political ramifications

All of the factors above are inflationary. The rising cost of living will naturally lead to demands for higher wages, which will put further pressure on inflation. Central banks fear a wage price spiral, and, learning from the lessons of the past, they want to dampen inflation expectations now, rather than allow higher inflation to become embedded for years to come. Central banks have been slow to act, it must be said, although they would not have foreseen the war in Ukraine or the full scale of Chinese lockdowns this year. These two factors, have tipped the balance on inflation, and left central banks with little option but to raise interest rates quickly, bring inflation under control, and regain some credibility.

As a longer term investor, it is better for inflation to be brought under control sooner rather than later. Although yet to peak, future inflation expectations are moderating and when inflation levels begin to fall, we would expect central banks to soften their language, to stop increasing interest rates, and stock markets will most likely rally again.

Volatility is expected to remain a feature of the markets over the coming months, the current levels of pessimism are likely exaggerated which in itself is usually a positive sign. At some point we will see a bottom and markets will start to recover, and this becomes a stock market downturn that lasts months, rather than years.

It is important to remember that past performance is not a guarantee of future returns and investments can go down as well as up. The above should not be seen as advice and you should take independent financial advice should you wish to make any investment decisions.