You may remember that in March of 2020, there was bloodshed on the streets (financially speaking, mostly on Wall Street). Investors were panicked, times were uncertain and unprecedented. Nobody knew what the world would look like in the months and years ahead. Governments around the world printed money and gave it out as ‘economic stimulus’. At the time, this was the most appropriate solution. Businesses were able to keep operating, and people were able to continue providing for their families.

However, at a certain point, the economy had stabilised. We were able to stand on our own two feet again. While it was nice, we didn’t necessarily need continued economic stimulus, cash hand-outs and the lowest interest rates in history that helped us through the tougher times. We were ready to return to normal, albeit a new normal. There would be changes, but they were manageable.

When we started to understand more about the road ahead out of the pandemic, businesses recovered. Financial markets recovered. We could all breathe a sigh of relief that the worst was behind us. You see, when I mentioned the panic of markets in March of 2020, the US share market was down approximately -32% from January 2020 to the 23rd of March lows. Not only did the market recover these losses, but it actually ended the year +15%. The 2021 calendar year then followed with a positive return of +26%. Not a bad recovery, right?

Unfortunately, governments around the world weren’t quick to respond to this and continued to print money and give it away. This is what has led to our current economic environment. The oversupply of money has meant that inflation has skyrocketed, with forecasted inflation for the rolling 12 months expected to be greater than 5% in most developed nations. This, at the same time that governments have heavily wound back any stimulus being provided.

Rises in inflation, along with supply chain issues as a result of the Russian/Ukraine conflict and understaffing due to COVID policies, has meant that most people would have noticed an increase to their weekly bills and costs of living – I know we have.

To slow inflation, central banks will usually look to increase interest rates to stabilise the economy – the idea is to (in a cautious and controlled manner) slow the flow of money to be able to decrease demand enough to take pressure off the supply chain to enable prices to moderate.

But how do consumers continue to afford the rise in groceries, mortgage repayments and other costs of living? Is current wage growth enough to sustain the rising costs, or will people begin to have to sacrifice luxuries to make ends meet?

This is where financial markets come in. When there are changes and uncertainties, particularly about economic stability or supply chain issues, markets respond. At the moment, markets are beginning to price in (begin to budget for), economic instability. When markets begin to sense rough seas on the horizon, they almost always begin to brace for impact. This is what happened in March of 2020 – we braced for impact. Thankfully, as I have highlighted above, the seas were not as rough as expected.

So how is this current correction any different from March of 2020? Is the market unnecessarily preparing for rough seas, or is it acting rationally? The primary difference is that March 2020 was the fear of the unknown, and this current preparation is fear of the known.

Markets know what can happen if inflation is left unmanaged and runs rampant. This is what the market is preparing for. Whether or not this happens, is the main determining factor.

How markets perform through this period will depend on how Governments and Central Banks manage and respond to these changes, and how quickly things can be stabilised. If the process is managed well, then markets will likely realise that they may have overreacted and ‘overprepared’ for something that didn’t materialise. This could lead to a strong resurgence in share prices, and a comfortable recovery.

Historical market returns show us that long-term investors will benefit from periods in history like this, and this is something that we should often see as an opportunity as opposed to a catastrophe. It provides opportunity to continue with an investment philosophy that purchases assets when they are considered a discount, with a long-term recovery nearly guaranteed (based on history).

It’s about staying controlled and disciplined through the rough seas and maximising on opportunities that are presented to us as long term investors.

As always, I am available to discuss any questions, comments or concerns you may have, so please don’t hesitate to contact me!

Sam

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