This is the last update for the year and is somewhat shorter than usual. Stephen Lennon, Head of Avellemy Private Wealth and Graham Bentley, Chief Investment Officer of Avellemy, one of our panelled investment management partners, have recorded a video summarising 2022 and looking forward at key themes to think about in 2023. This will be coming out in a couple of weeks’ time and we hope you find it both enjoyable and informative. In the meantime, please find below, your latest update on the markets.
3 years of extreme volatility
The end of the year is approaching rapidly, and the past 2 weeks has, thankfully, been one of relative calm in financial markets, when compared to the tumultuous markets we have encountered during 2022.
But it is not only 2022 that has posed challenges for investors. The past 3 years has been one of much higher volatility, i.e. the magnitude and frequency of price changes, and on some measures, investors have had to deal with volatility higher than that experienced during the Global Financial Crisis. The chart below shows just how much market risk has increased, in this case in US equities, since the onset of the pandemic in 2020:
It is, then, no wonder that this year has left investors feeling perhaps a little jaded. Those who are newer to investing might be wondering why they bothered risking their hard-earned capital. More experienced investors, who enjoyed a little over a decade of low market volatility and high portfolio returns, may have felt a little shocked by the experience of this year.
Roll on 2023?
A year when war broke out in Europe, inflation soared to its highest in 40+ years and portfolio returns have been negative (so far) will be one that many might be glad to see the back of.
But, as I have said before, it is always darkest before the dawn. Whilst the economic outlook is grim, we should remember that the stock market is not the economy. Markets are forward-looking, and portfolios can do well in a recessionary environment.
We believe that much of the economic outlook is now priced into financial markets, particularly bonds, and that the onset of a recession could actually be a good thing for portfolios. It is also worth highlighting that, historically, severe recessions have been caused by some exogenous global shock such as the US housing market bubble bursting in 2008/9, or the COVID-19 pandemic in 2020. There has been no such shock this time around and recessions caused by central banks raising interest rates too quickly or too high, as we think might be the case soon in the US, tend to be shallower and shorter lived.
In any case, as recession bites, central banks will have no choice but to cut interest rates to stimulate economic activity. This is good for both bonds and equities and we increasingly believe that the worst is behind us for client portfolios.
As we look forward to the festive break, I am acutely aware that it will be a challenging time for some. Food, energy, and shelter costs have rocketed, putting pressure on those that can afford it least. Perhaps then, rampant consumerism can take a back seat and community can come to the fore this festive season.
Personally, I am grateful that the” locked down” days of the Pandemic are well and truly behind us and that this time of year is one that, once again, affords opportunity to gather with friends, family and loved ones. Coming together and connecting with others is precious time, well spent, and I sincerely hope that you have a wonderful time.
Until next year, stay well.
