Exactly this time last year, we were facing the new Omicron variant of COVID-19, interest rates were at 0.1%, inflation was at 5%, Boris Johnson was prime minister, and there was no Russia / Ukraine War. One year on how things change. COVID-19, something which the majority of the world seems to be getting to grips is still rattling the markets via China, where they are still locking down and aiming for a zero infection rate, leading to protests and supply chain disruption. Two prime ministers and seven rate hikes later we now see interest rates up to 3%, and inflation has rocketed from 5% to 11%. War which broke out when Russia invaded the Ukraine in February this year is still in full flow with no real end in sight. It really has been an exceptionally tough year, for companies, for individuals and of course therefore for investments.
That said, we have had some positive movements since my last update. Inflation in the US may have peaked – since reaching 9.1% in June, each month it has slightly reduced, leading the world to believe that interest rates in the US may not have to rise as much as initially expected. This has had a positive impact on the markets overall in the last month:
The FTSE is up 6% leaving the FTSE 100 flat year to date but the FTSE 250 still down 20% year to date.
In Europe, the Eurostoxx 50 is up 8% over the last month, leaving it 9% down year to date
Finally in the US, the S&P500 is now down 17% and the Nasdaq 30% year to date - both improvements on the last month.
As you can see above, we do still have a long way to go, and we are certainly not out of the woods as yet. In the UK, we get the next inflation figures on the 14th December and the next interest rate decision on the 15th December. In the US they are one day earlier, with inflation figures on the 13th December and the next rate decision is scheduled for the 14th December. Europe follow a day later with their interest rate decision on the 15th December. We know that across the board, rises are expected, however it will be the size of the rate rise and then the associated commentary around how much further there is to go that will really impact the markets. Smaller hikes, and lower overall rate expectations will certainly drive markets positively, with larger hikes and higher expectations doing the opposite.
So what does 2023 bring us ? Well if 2022 is the year of peak inflation, it should follow that 2023 is the year of peak interest rates. The timing of when those interest rates will peak will be a big driver as to how long we continue to suffer this bear market into 2023. The majority of market commentators do believe that markets will become more positive as the year progresses, which means those that have and continue to remain patient and disciplined enough to remain invested should be rewarded with time. Of course, outside of the whole inflation / interest rate story, the ongoing war in Ukraine continues to pose energy and security risks, and an escalation of the conflict does pose a key risk to markets. Conversely, any sign of the war abating or ending will provide a very positive market movement.
Even despite the slight positive moves in markets this last month, company values and equity markets are still a lot lower than they were a year ago and so putting money into the markets still looks attractive if you have capital available and you are comfortable with a 3-5 year time horizon.