Is the current economic gloom priced into the recent equity market drop?

Jake Taylor – Sterling Grange Financial Planning

20/06/2022

For the week ending 17th June 2022, it was the worst week for equity markets in over 2 years and the worst start to a calender year in over 50 years for the USA S&P500. This was due to the 0.3% larger than expected USA annual Inflation reading of 8.6% (expectation of 8.3%). This higher inflation reading has caused the USA to come out with a 0.75% interest rate rise to 1.5% which has spooked the markets.

Whilst Australia has been relatively protected by its commodities, due to its increase in energy demand off the back of the Russian invasion of Ukraine, the Australian Share Market is starting to crumble under inflation pressure. The RBA Governor, Philip Lowe, came out last week saying inflation by year-end is now expected to rise to 7% which will no doubt result in increased interest rate rises and further share market pain.

With all the economic gloom and the now stress of the highly anticipated recession weighing on people’s investing behaviour, is it time to run and sell down your portfolios? To be clear, No, now is not the time to sell up. The time to sell was 4th January this year when markets peaked. The Australian Share Market is now down almost 17% and the USA’s S&P500 is down over 23%. So what should you be doing?

It is important to understand that investment markets are forward-looking. So if you feel like there is a recession on the horizon and this is what the media is telling you, then chances are that equity markets have already priced it in. Now is the time to start looking at what else could go wrong versus what could surprise the market and be that next investment opportunity.

Things that I am focussing on are the re-emergence of China from its self-imposed ‘zero-covid’ lockdown. This should free up restrictions within China which will add well needed supply and ease of trade for global economies. Also look for the signs of a resolution of the Russian invasion of Ukraine which will hopefully ease commodity pressure. However, if this continues look at countries and/or companies that will continue to experience the benefit of increased demand for their commodities or those well positioned to supply alternative energy sources.

Another thought is to really review your defensive asset allocation (cash, fixed interest, bonds). Are you exposed to rising interest rates by holding funds with high duration (i.e. negative sensitivity to rising interest rates)? If so, then it is important to understand that when interest rates rise, longer duration defensive fixed interest funds will be sold off. So position yourself accordingly, as it looks likely that interest rates will only go backwards if a recession comes into play.

At times like this when things are scary you need to ask yourself do you maintain your passive approach and just continue to hold or do you trust an expert active adviser who can help your portfolio navigate the ups and downs. Speak to Jake Taylor at Sterling Grange Financial Planning if you would like to understand more jake@sterlinggrange.com.au.

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