The last few years we have seen great performance from stock markets and 2021 was no different, despite heavy market volatility.
2022 may be a different story, as far as market returns are concerned, as we saw Covid hit crazy numbers, albeit a less aggressive version, and global supply chains could no longer withstand such prolonged disruption.
The normal cause of inflation is exaggerated levels of economic growth, however, we are seeing inflation caused by bottlenecks in global supply chains, thus people are not buying more, but struggling to get access to the same things they normally buy. This is simple economics; if supply is restricted, the price goes up, which is what is happening.
The normal government counter inflation tool of increasing interest rates, designed to restrict the flow of money, is not going to have much effect, which is why we are not seeing interest rates leaping ahead. Reducing money supply could do more harm than good, choking already struggling businesses who are surviving on credit. Interest rates may rise a little, as this would allow governments / central banks to be seen to be doing something, however, only by micro amounts, and from an exceptionally low base.
Clearly, the war in Ukraine is going to make a bad situation worse, since oil and gas are at the base of supply chains and the western world has just cut off Russia with punitive sanctions, which is a major supply source.
The result is that the situation will probably get worse before it gets better, so we can expect a continued roller coaster ride in 2022 as politics and war take center stage.
Coping with such volatility is easier for those who have seen years of growth, however, for recent investors, seeing negative figures on their statements is likely to cause some anxiety, especially for the inexperienced.
Investing is a marathon and not a sprint, as it is a long-term strategy. Entering the markets and pulling out when there is a problem, is a guaranteed route to capital loss.
If we think about the psychology of investing, and the graphic above, we are currently in the “frightened” part of this curve, so at the point of a “paper” loss (so not real unless assets are sold). We are also at the point of the highest expected return, thus those with cash, or invested very conservatively, may/will see this as a buying opportunity. What no one can possibly know is the exact timing of this curve, so clearly patience is key for a successful investor.
Making money on the markets is not rocket science. Indeed, if we cut it down to the simplest statement possible “buy cheap – sell expensive”, it seems obvious, yet this is not what most people do. Greed makes us buy when markets are high, and fear drives us to sell when markets are falling.
What happens next is unknown, as is always the case. Has anyone accurately predicted what has happened in just the last 24 months? Of course not, however, global markets, overall, were (at the time of writing) up over that incredibly unsettling period.
This means we remain market positive, as people and institutions keep away from cash and seek returns in the markets. However, markets will remain volatile until the long-term effects of the war in the Ukraine can be quantified.