Keeping At It
Paul Volcker was Chairman of the US Federal Reserve from 1979 to 1987, and his memoir is titled “Keeping At It: The Quest for Sound Money and Good Government.” Volcker was widely credited with having ended the high levels of inflation seen in the United States throughout the 1970s and early 1980s.
Many see the current Chairman, Jerome Powell, emulating Volcker by doing “whatever it takes” to get inflation under control. Currently inflation is raging at 40-year highs and interest rates are rising at their fastest pace in history. Recession in the US, UK and China seems inevitable.
Year to date the Australian market is down nearly 10%, while the US market is down over 20%. However, one must look at the current market downturn in the context of the last few years. Between March 2009 – the start of the recovery from the GFC – and December 2021 the Australian market gained 280% in total return, while the US market – powered by the large tech stocks – had a total return of 740%.
This year has been a roller coaster ride for investors. Early in the year inflation turned out to be higher and more persistent than the central banks – and the market for that matter – had expected. This resulted in falling stock prices and rising bond yields and was further compounded in February by the Russian invasion of Ukraine, which caused food and energy prices to spike.
Between 1 January 2022 and the middle of June the Australian market fell by 11.3%, the S&P 500 by 22.5% and the NASDAQ, the measure of tech stock performance, was firmly in bear territory and down just over 30%. But markets turned the corner in mid-June. Economic data out of the US indicated inflation was starting to moderate. Key inputs oil and gas were coming off their highs despite the continuance of the Ukraine conflict. Markets rallied on the assumption that inflation would not be as high as thought earlier, and therefore central banks would be able to slow and moderate the future path of rate rises.
Throughout July and most of August stock markets around the world started to climb, both the Australian and US stock markets were up by more than 10% over the period. But this turned out to be a “bear market rally” – a sharp, short-term rebound in share prices amid a longer-term bear market decline.
Market Overview
- Australian and Global Bonds have significantly underperformed cash. This has been the worst 12 months in modern history for bond investors.
- The Australian Equity Market returned 0.04% for the quarter and -7.7% for the year. All Sectors except Energy were negative over the year.
- The biggest influence on Developed Markets is the US, which makes up around 65% of the MSCI World Index, and then Europe which makes up a further 15%.
- The biggest detractor in Emerging Markets was China, which makes up around 30% of the EM index, and is down 18% for the quarter (in AUD).
- Australian and Global REIT’s have been hit particularly hard by the re-pricing around interest rates and have been the worst performing asset class over the last year.
Major Markets Are All Negative Year To Date
Markets around the world have been hit by rising inflation, tightening monetary policies, the strong USD, and the ongoing uncertainty from the conflict in Ukraine. Chinese stocks have been hit hard as the Covid-Zero policy and property market slump took a toll on the nation’s economy, and Sino-American tensions over Taiwan and Russia weighed on the market.
Domestic Factors
The RBA raised the cash rate by 50bps to 2.35% during its September meeting but delivered a surprise in early October by lifting the cash rate by 25bp to 2.6%. At quarter end the yield on the 10-year government bond rose above 4%, hovering around its highest level since early 2014, amid the prospect of surging inflation and rising borrowing costs.
Global Factors
The 10y – 2y spread has increased over the last quarter. Yield curve inversion has been seen as an indicator of a coming recession in past cycles. Recent comments from the US Fed have confirmed the central bank's commitment to bring inflation back to its 2% – 3% target, and Fed members forecast that rates will reach 4.4% by the end of this year.
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