2022 has certainly gotten off to a bumpy start. The changing narrative around inflation becoming more entrenched, and how Jerome Powell and the US Federal Reserve are going to tackle it, is hogging the headlines. Other concerns compounding the uncertainty include the rising tension on the Russian and Ukrainian border and the potential impact that may have on already high energy prices; as well how the Omicron variant plays out. Does this spell the end of the pandemic, or are there are deadlier variants in the pipeline?
The net result of the above concerns has been volatility across the board. Table 1 below highlights the year to date returns of a number of indices and indicators. There have been few places to hide. US markets are bearing the brunt of investor anxiety, and for good reason. The tech-heavy NASDAQ is officially in correction territory and the S&P 500 is not far off. Ultra-loose monetary conditions have supported markets for a long time, leading to many companies being priced for perfection. Hesitancy around growth outlooks for both the global economy and many of these high priced companies has resulted in their share prices retreating sharply, with many investors rotating into cheaper and more cyclical companies. While always uncomfortable, this is healthy for markets. Current market conditions always serve as a timely reminder that they cannot keep going higher in a straight line.
The rotation into cheaper parts of the market has also assisted emerging markets and the South African market. Both indices have retreated by a much narrower margin than their developed market counterparts.
Table 1: Year to date returns (local currency)
THE BOTTOM LINE
As with everything in the markets, context is important. Despite the recent volatility and pullback, over a one-year period, major global indices are still significantly higher than they were 12 months ago, as evidenced by graph 1.
We advise investors not to get caught up in the short-termism of headlines and to rather place things into context, stay calm and remain invested — through both good and unsettling times. At the end of the day, we know that markets always trend higher over the long term.
Graph 1: S&P 500 Index and the JSE All Share Index Over One Year
