Market update – What happens now?
Given current market circumstances we felt it was important to send out a note to you, our valuable clients, to reassure and inform in these volatile times.
Firstly, what is happening?
Tuesday morning saw the local sharemarket fall over 5% initially, to finish just under 4% down at close. This is the largest market fall we have seen since the pandemic panic in early 2020. The market has continued to fall this week. The US market is officially in bear market territory, and we may not have seen the worst of it.
Why is this happening?
Markets are reacting to higher inflation than expected, which is fomenting fears that central banks are “behind the curve” and will be forced to increase interest rates far higher than previously forecast. We now have a toxic cocktail of rising inflation and rates, falling growth and record commodity prices spurred on by war in Ukraine.
How did we get here?
It is apparent now that central banks were too relaxed re rising inflation, and this has been exacerbated by events such as the war. They are now racing to catch up, and we can expect some significant interest rate increases as a result.
What could happen next?
Now that the genie is out of the bottle, markets could continue to fall in what is now clearly a bear market. This could continue for a little while until inflation is under control. Whether this results in recessions in the US, Australia and the rest of the world will be the major issue.
What should I do now?
Clients should be taking a long term view at present. Markets often panic and overreach and there is some evidence at present that this has occurred. Many good solid companies are now selling at prices that are well below their valuations.
Markets are effectively pricing in a global recession. This may well occur in Europe and possibly the US, but the consensus is still that it is unlikely. Certainly a recession here in Australia is rated as a very low risk. If we avoid recession then current share prices represent exceptional value, and long term investors will experience a strong rebound when normality returns.
The message is to hang on and wait for the inevitable recovery. Investors who panic and sell now will be locking in permanent losses. Clients should think back to early 2020 when the pandemic took hold. Markets took a significant hit initially but recovered very quickly.
Realistically the recovery this time is likely to be more protracted as current events play out, but there is no doubt that markets will recover, and consequently opportunities will arise for those who are patient.