2022 has been a year where no asset class has been safe.
Stocks are down across the board, with the S&P down 23% YTD, the Nasdaq down 32%, and the Dow down 16%.
The usual safe haven of the bond market has also been decimated, with yields getting slammed by continued uncertainty from central banks, most prominently in the UK.
Commodities have been more volatile than seen in decades, as Russia’s invasion of Ukraine pushed energy and agricultural assets to decade long highs.
As you’d expect, anything remotely close to an NFT or cryptocurrency has been utterly slammed, as even the most hardened crypto permabull began to question where the pain would end.
The most encouraging advice I can give to investors new and old is as follows; it will end.
No bear market has ever been severe or widespread enough to wipe out all investors. If the S&P went to 0, then we’d have a lot more to worry about than the colour of our portfolio performance.
Markets have been through war, pandemics, financial collapse, hyperinflation, bubbles bursting, political scandal, property crashes, and a whole host of others.
The cause of this crisis is complex, but can be attributed primarily to the necessary actions taken by global governments to keep the world spinning during the lockdowns of the pandemic.
With so much free money, speculation in markets ran into overdrive, leading to sky high prices for assets with limited use, and elevated stock prices for nearly every company in the market.
Bond markets naturally were a lonely place to be, with yields in the equity markets far exceeding those which could be achieved in the traditionally sensible places to be putting money to work.
The key dilemma for the Federal Reserve in the USA was when to stop the music. With lockdowns continuing in many states, when was the right time to pull the plug on the economic support, and tell people to get back to the world?
Most experts now agree the time for this was far before they began rising interest rates in early 2022. By then inflation had become a word which even the least economically interested corners of the population began to routinely mention.
Since then, the Fed has been on a mission to try to cool inflation down to their mandated 2% level. Use of the CPI and other metrics has been critical for assessing progress, but months into one of the most aggressive hiking cycles in history, little has been done to bring values down.
The wider population are as yet most likely more aware of the rising inflation than they are of the rising interest rates being used to tackle it.
If the Fed focus too closely on the wrong metrics to cool inflation, there is a very real chance of a policy mistake, where they overcorrect, meaning that when the impact finally hits, it could be terminal for businesses and the economy as a whole.
Many suggest that instead of using lagging indicators such as CPI, the Fed should be using much more current and meaningful metrics to determine the right action.
The next few months will bring us closer to the Fed’s terminal rate of interest rate hikes, with 75BPS hikes expected in November, and potentially December.
Where we will be by the start of 2023 remains unknown, but with markets beginning to price in the end of the pain, and see some light at the end of the tunnel, some key questions remain.
Is the worst still to come? Or the seemingly inevitable recession already largely priced in due to the enormous lead in time we’ve had in the markets.
Can the markets level off and bottom at this level? Or has the bubble which the infinite money printing of QE (quantitative easing) in 2020-2021 to keep businesses and individuals afloat led stocks to levels far beyond reality, meaning we have even further to fall?
Finally, will the strength of the Dollar cool down? As global investors both institutional and retail flock to cash, the safe Dollar has boomed to record highs, hitting companies with operations abroad as foreign exchange fees complicate business models alongside problems in supply chains.
Intervention from the Fed seems unlikely during a midterm election cycle, but difficult decisions remain ahead for the world’s most powerful economy.
Uncertainty remains for markets, but if you have the stomach to stay at the table, and take every beating the market takes as a lesson, when the good times come around again, you’ll be more than rewarded for your patience.