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Home Markets Markets
Published 19 December 2022
Important information – the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
NOTHING to see, move along. As we glide down to Christmas this week, there’s a dearth of company news and only a handful of economic announcements. So, instead, let’s take a quick look back at 2022 and forwards to 2023.
Tales of the (Un)expected
This year has been a curious mixture of what we predicted would happen and what came out of left field. A year ago, the S&P 500 closed at 4,797 on 3 January 2022. It would turn out to be the peak for the year and by October the US benchmark had fallen by 25%. It was a difficult year for investors, made worse by the fact that bonds and shares both fell at the same time.
What we knew would happen was that the Federal Reserve would call time on zero interest rates. By the year end they were 4.5% and the markets knew that this would exact a heavy toll on the economy and so our investments. Inflation was already at 6% and Jay Powell, Fed Chair, was warning us that rates needed to rise in response.
What we didn’t expect was what came in February. Russia’s invasion of Ukraine was not a complete surprise after the annexation of Crimea in 2014 and a long incursion in the east of the country. But when it actually came, markets quite rightly took fright. The principal economic impact of the war has been soaring inflation on the back of spiralling energy costs. And that has made a difficult job for the Fed and other central banks almost impossible.
The rest of the year has pretty much been these two themes – inflation and monetary tightening – playing out.
So how does this leave us as we head into 2023? Self-evidently, markets are a lot cheaper than they were a year ago. But they are not that cheap in the face of a possible recession on both sides of the Atlantic and a likely decline in corporate earnings next year.
The yield curve is flashing red. When yields on short maturity bonds are higher than those on longer-term ones the message is clear. Central banks are squeezing too hard and the economy is heading into a downturn.
So the question is how much of this bad news is now in the price. Perhaps not all of it, but markets like to look ahead and so shares will start to rise well before an improvement in the economy. This is likely to happen at some point in 2023.
And investors may get a double whammy if bonds also rise on falling interest rates as central banks realise that they may have gone too far too fast with the monetary squeeze.
As ever, the best approach is to drip savings into market steadily and regularly over time. That way, if the market has a bit further to fall, you will pick up investments at cheaper prices. And if it has actually bottomed out, then no-one’s going to complain.
Important information – investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall.This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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