What's happening with investment markets?
As we write this, several leading indicators have aligned toward the negative.
- Falls in the New Zealand and global share markets. US share markets reported their worst week of trading since 2020 when COVID soured market sentiment.
- Inflation, after years running at a negligible rate, has increased dramatically not just in New Zealand but worldwide. Meanwhile the global causes of inflation are still with us. These include the war on Ukraine by Russia (driving oil, key raw materials like lithium, and wheat prices up), trade embargos, as well as the COVID related slowdown in supply chains. There comes a point when inflation spirals out of control as everybody puts up their prices but in doing so feeds the genie which was so successfully kept in the bottle since the late 1980s.
- In the USA, the Federal Reserve has increased their interest rate, in an effort to take the wind out of inflation, but it is also at risk of steering the US economy towards out and out recession where confidence, productivity and trading all fade.
- House values have dropped markedly. Interest rates going up will affect companies and households with too much debt.
What are the causes?
To some extent there is no single cause but, rather, a host of events which have rattled a once positive marketplace and have impacted on the decisions of investors and nations alike.
There is always ‘bad news’ in this world, but the current crop of COVID, the war in Ukraine, oil prices, and climate change have all contributed. The climate events include raging forest fires and drought in North America and massive hot-weather events over Europe.
These events have the effect of causing heightened uncertainty and this uncertainty tends to be contagious. World investment markets are very reactive and have always been that way. Investors themselves are driven by emotions which add fuel to economic cycles. The chart below illustrates the stages.
What do we learn from history?
You can see from the table below that there are common threads to investment cycles – during the upturns as well as during the downturns. Most modern recessions have occurred in response to some combination of inflationary pressures, risky asset price bubbles and higher energy prices.
What is not known is the length of recession. This varies. You can see in the table below that the average length of recession in recent decades has been 10 months.
Note the gaps between recessions. They typically last between 6 – 10 years which is when markets pick up and investor returns are both sustained and positive. For example, during the severe GFC of 2007/2008, the US share market lost 50.4% in value – yet after falling for 16 months the share market staged a bull run that lasted 11 years. Handsome gains were made by people who rode out, or even purchased during, the negative times.
Or look at the surprisingly rapid rebound in share prices during the COVID-recession of 2020.
Our clients’ portfolios have weathered many downturns and have thrived in consequent years. This current situation doesn’t strike us as particularly abnormal.
We understand if people are nervous
The current situation may be unnerving especially for newer investors who are watching their net worth losing ground.
Likewise, those approaching retirement may be feeling edgy about their KiwiSaver funds. If you’re fretting about these things, contact your adviser.
New Zealand’s economy reflects the global economy, so on one hand there is very little the Government or the Reserve Bank can do to lessen our exposure to the economic climate.
On the other hand, we have a few things going for us.
- NZ unemployment is very low.
- Tourism, a major earner, is opening up once more.
- The NZ dollar may be weak compared to the US dollar, however for investors with overseas investments in their portfolio this differential works to your advantage.
Across the board, yields from many investments are higher now that prices are lower. Term deposits and bonds are showing better future returns than the last few years. Globally, most economies are opening up as the pandemic becomes “normalised”, and even in gloomy times human ingenuity presents opportunities for investment.
Markets eventually bounce back, but we don’t know when.
Here's what you should do
Relax. Don’t monitor your portfolio every day. Treat your portfolio as you might regard your house. The current valuation, the cv, may rise and fall but that doesn’t really affect your enjoyment of the home.
Ride it out. Remember, your portfolio is designed for a long-term time frame. It has diversity, quality investments, and a strong rationale.
Rejoice. We have not in our strategies exposed you to bitcoin or other cryptocurrencies. These have plummeted in value and some crypto participants have barred investors from selling.
Refrain from selling. Don’t be ruled by kneejerk reactions to the market. The old adage of buy low, sell high still applies.
Require extra money? We can take it from parts of your portfolio not as affected by the volatility.
Here’s what we are doing at Stuart Carlyon
We are in constant contact with our suite of fund managers and regularly review their performance against market indices. We’re being generously updated with information and presentations that help us to stay on top of changes in the market.
Rather than get carried away by market sentiment which often results in markets being oversold, we focus on fundamentals that drive long term performance.
Portfolios are well diversified, and we will keep to this strategy as it is the best defence in reducing downside. Your portfolios don’t bear the full force of the market declines as we do not have large positions in any one sector, country or industry. For example, the US share market is down -23% from the start of the year but, depending on your risk profile, your portfolio might be down less than half as much. In dollar terms, the numbers look ugly on paper, but no loss is incurred unless you sell.
We’re on hand if you want to discuss your portfolio and your life goals. That’s what it’s all about.