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The current state of the markets: 5 questions answered

By David Norton - May 03, 2022

This week, I answered 5 questions about the current state of the markets.

Because right now, a lot is happening...

Our regular readers will know that we advocate ignoring the noise and remaining on their long-term investing journey. 

However, I also appreciate this is an extraordinary time, and there are common questions investors are asking about the markets, what might happen next, inflation and DIY investing. 

I answer these below.

1. Can you explain what's happening in the markets right now? 

It’s been a historically challenging market, with both stocks and bonds down year to date as policy confusion and Russia’s invasion affect markets.

The tragic war in the Ukraine, a global energy shock and the Fed’s hawkish pivot – all in the space of a few months – have sparked reassessments of macro scenarios among market participants.

However, it has been the sharp repricing of interest rate expectations, that has hit risk assets the hardest.

2. What do you think will happen next? 

Look, we don’t know and I certainly wouldn’t want predict where the market will end up over the very short term.

We're watching the Fed slow down and pull liquidity out of the financial system.

US policy rate pricing

This was going to have to be priced in eventually, and it seems to be happening now.

However, it looks like the market does not see a recession in the near future, but is certainly bracing for a slowdown.

It is important to note, that stocks still remain one third above pre-pandemic levels and so far in Q2, 80% of companies are beating Wall Street estimates by an average of 8%, so earnings appear fine.

S&P earnings Q1 2022

3. What would you say to someone who is worried about whether now is the right time to invest or has had poor performance?

We often say that the best time to invest was yesterday...

But the next best time is today.

Stock markets inevitably rise and fall. Crashes, corrections and recoveries are often short and sharp; and sometimes bull and bear markets can last for many years.

The S&P is down 13% year to date, but all that does is put it back to where it was 1 year ago.

S&P 12 months Q1 2022

The US market typically sees ‘usual’ drawdowns of around 14%, so this particular period is within those parameters, however, I'm conscious that people are likely to be concerned.

Our advice remains the same…

You need to ignore the noise, and just keep investing, month after month, for decades.

Just keep buying that diverse set of income-producing assets.

My team and I are more than happy to offer a second opinion on any existing portfolios that are not holding up in this current volatility.

4. How should investors prepare for inflation?  

Yes, I think it's understandable that investors would wonder if stock returns will suffer if inflation keeps rising.

However, there's some good news: inflation isn’t bad news for stocks.

A look at equity performance in the past 3 decades, does not show any real connection between periods of high or low inflation and US stock returns.

Stocks v inflation

Since 1992, one year returns on stocks have fluctuated widely.

Yet, the weakest returns can occur when inflation is low, and 23 of the past 30 years saw positive returns even after adjusting for the impact of inflation.

Over the period mentioned, the S&P posted an average annualised return of 8.1%, after adjusting for inflation.

The annualised inflation-adjusted return on US stocks is 7.3% when going all the way back to 1926.

Diversified, multi-asset portfolios are there to remove the emotions from investing.

But it's important to have an appropriate time horizon.

5. I am a big believer in DIY - why would I change to work with a planner? 

in recent times we've seen that DIY investors have managed to outperform fund managers.

In fact I just finished a blog covering this.

But it’s not a huge surprise to see fund managers struggling despite their promises, and that’s why we use a Nobel prize-winning, evidence-based investment strategy.

Investing is not about trying to outguess Wall Street or meme investors, on which stock will go up or down, and when.

It’s about choosing to side with human ingenuity and betting on a future that's better than today, that’s linked to your dreams and aspirations.

This leads nicely onto working with a Chartered Financial Planner, as selecting a portfolio is only a small element of what we do.

Our main job is to help clients design a personalised financial plan that allows them to concentrate on the more enjoyable elements of their life.

We build it using the relevant tax wrappers and creating an investing portfolio that allows them to achieve their goals.

We then work to protect that.

We know that the behavioural side is incredibly important, and holding our clients to account in terms of their saving rate as an example, is much more important than if their DIY portfolio delivers 5 or 6% each year.

cashflow post

Again, this enables them to focus on what matters to them and their loved ones.

Therefore a planner’s job is to design, build and protect the ideal future of our clients.Get a second opinion