What’s behind 2022’s wild ride?

*This content is brought to you by Brenthurst Wealth

By Mags Heystek*

If you’re still holding onto your hat despite the wild ride that global markets have presented in 2022, then you might want to take a moment to pat yourself on the back. Staying invested in the market despite the unpleasant turbulence is the right thing to do, although not always easy to do.

In some respects, you might be considered a masochist for enduring the pain that the 9-month bear market has inflicted on investors. With the market having dropped 22.46% so far this year, you might feel justified in cutting your losses. But that would be a mistake – and a costly one at that.

Let’s look at what has driven the markets this year, and how that influences your strategy going forward.

All markets bathed in red

I think it’s important to understand that no single asset class has performed well in 2022. Equities, property, commodities and bonds, even cryptocurrencies, have all performed terribly.

In fact, the only real ‘asset’ that’s performed well is the US dollar, which is up nearly 18% since the beginning of the year, making it the best-performing currency in 2022.

There is some irony in the mighty dollar remaining strong despite the economic headwinds the country faces. As elsewhere around the globe, the government is trying to tackle rampant inflation that comes after a period of quantitative easing stretching back to the 2008 global financial crisis. The fiscal response to the COVID pandemic in 2020 has further inflamed the current situation.

So, the US is now experiencing high inflation as a result of these stimulus packages, the conflict in Ukraine and the impact on oil and food prices. The market response to these challenges has been brutal, with a firm bear market taking hold as hopes for a global economic recovery fade.

Despite these challenges, we still stand firm in our US-centric view on the best investment opportunities by virtue of it remaining the largest economy in the world.

The US inflation prognosis

The one problem with the US being such an influential market is that its economic ailments affect the entire global economy. So, our fortunes are tied to those of the US economy, whether we like it or not.

Let’s look then at the prospects for inflation in the US starting to abate. Here are a few of the signs we see that this might actually be the case.

Leading indicators like commodity prices, rent, profits PMI indices, car prices and logistics rates are all in decline. We have also seen core import price inflation fall in of the past three months, while average hourly earnings have been rising slower than prices and several other economic indicators moderating.

This will be welcome relief given talk about a possible global recession – stagflation even – if inflation is not brought under control. And while the US Federal Reserve’s rapid quantitative tightening aims to curb inflation, fears remain this action could push the economy into recession.

According to Ninety One Asset Management, there is a 60% likelihood of a global recession, a 30% chance of stagflation, and a 10% probability of a ‘Goldilocks’ scenario where the economy is perfectly in balance.

There is a general consensus that inflation will start coming down in developed markets in Q2 2023 after peaking toward the end of 2022.

Will volatility moderate?

Volatility in market prices is never easy to stomach, even though it’s a fundamental feature of the markets. A common measure of market volatility, known as the VIX or the ‘fear indicator’, is often inversely correlated to the performance of the S&P 500.

When the VIX rises, the S&P500 tends to drop, and vice versa. The VIX was at roughly 37 points shortly after the Ukraine invasion, but it is currently still lower now. In fact, it’s still much lower than the 30% market correction of March 2020 (82,69, an all-time high), as well as the Global Financial Crisis (GFC) of 2008 when the VIX peaked at 80.74 points.

This year’s perceived market turmoil is therefore not close the worst that we’ve seen in the recent past. The lesson being that now is hardly the time to panic as we’ve been through far worse

In fact, as you’ll see, not reacting to this year’s market downturn would deliver the best returns for the period 3 December 2007 to 27 September 2022.

Bull vs Bear markets across the ages

Data shows that when the S&P 500 fell 25% at any point over the past 15 years, that doing nothing would have delivered a 204% return, with losses from the 2008 crisis being recovered by March 2012. If you’d moved half your portfolio to cash after the 35% drop, and then reinvested a year later, you’d be up 154% and recovered fully from GFC losses by February 2012.

However, if you’d moved 100% to cash and reinvested a year later, you would be up 99% and recovered fully from GFC losses by January 2012.

So, as much as I hate to harp on about ‘don’t panic’ when market turbulence makes you feel uneasy. The numbers speak for themselves, and the long-term outcome from the 2022 downturn will be no different as long as you hold onto your hat and ride out the storm.

• Mags Heystek, CFP®, is head of Brenthurst Wealth Sandton