This year, we have seen a great deal of turbulence in the share market. After falling sharply in mid-June, share markets experienced a brief window of recovery in mid-August reversing half of their declines.
Since then, shares have fallen again and bond yields have hit their lowest point in a decade. Inflation remains high. Most countries have been lifting interest rates aggressively for the first time in years to reduce spending and bring inflation under control. As of October 2022, Australia’s average inflation was 5.4%, Western Australia’s rate was 7.6% and is expected to go higher. This high level of inflation is concerning for the RBA, as it leads to lower living standards.
Fears of an escalation of the Ukraine war and ongoing tensions with China are not helping investors confidence in the market.
September and October are also months where we typically see weaker periods and volatility in the market. This can be magnified when the trend in shares is down. Despite the volatility, October was the second best month of the year for share markets in Australia, the US, UK, France and New Zealand—although these gains were impressive, it should be noted that the market is still down for 2022.
Many of America’s largest companies released their quarterly (July-September) results in October, including tech giants Apple, Microsoft, Amazon and Alphabet (Google). Shares in these four companies declined after earnings fell short of forecasts. These results are significant as the four companies combined have a market value of ~A$9.3bn, over three times the size of Australia’s entire share market.
While the outlook for the market seems uncertain right now, there is some light at the end of the tunnel. Several of the key factors which initially drove inflation in the US are slowing—weakening growth in new market rents and softening used car prices.
Market falls make investors anxious—no one likes to see their investments fall in value. At times like these it is important to focus on basic investment principles. Keep in mind:
- Contractions in the share market are healthy and normal – their volatility is the price we pay for the higher returns they provide over the long term;
- It’s very hard to time the market. The key is to stick to an appropriate long-term investment strategy;
- Selling shares after a fall locks in a loss—you will only lose money if you sell;
- Lower share prices provide opportunities for investors to buy them more cheaply;
- Australian shares still offer an attractive income (or cash) flow relative to bank deposits;
- Avoid panicking and getting thrown off your long-term investing strategy; and
- Diversifying your portfolio and spread your investment risk.
While inflation remains high in the US it may have reached it’s peak and points to the potential for inflation coming down in the near future, enabling central banks to slow the pace of rate increases. If this applies in the US, Australia will likely follow suit, as we tend to lag behind the US with respect to inflation by about six months. The RBA is expected to slow the pace of rate increases ahead of the US, due to the increased sensitivity of Australian households to higher rates than in the US and lower inflationary pressures here.
For specific financial advice, please consult with a financial advisor. Armada have a team of expert Financial Planners who can help guide you on your investing journey. Get in touch with your advisor for more information.