Q3 2022 Market Updates: More Pain To Come
Updated: Apr 2
Another quarter has passed and it is time for us to look at what has happened in the market over the last 3 months.
For the third quarter 2022 market updates, I would like to focus on the topic of inflation and interest rate as these are the two core factors that are contributing to pessimism and poor performances in the market today.
Without further ado, let’s get started.
On the topic of inflation, looking at the United States Inflation Rate behaviour, it is clear that there is still a long way to go for the rates to come back down to the federal reserve’s target of 2%.
In fact, by examining the people's expectations on the ground, the survey results showed that most people expect the inflation rate to remain elevated for at least 1-2 years before returning to the federal reserve’s target.
On the other hand, the markets, as represented by the breakeven yield, are pricing in a situation where the inflation rate will come back down to 2% soon.
All things considered, it is likely that the inflation rate in both the US and the rest of the world will likely remain elevated for the next 12 months, resulting in more pain in the markets, especially over the next six months.
This is because, as inflation remains elevated, more people are expecting the market to fall as opposed to rally which will cause a higher selling pressure thereby resulting in a self-fulling prophecy in fear of the impacts of the central’s bank intervention which brings me to my next point on interest rates.
To maintain price stability, central bankers all over the world are increasing their interest rates in an attempt to slow down economic activity and push down the demand for goods and services.
The 2-year yield in the US had soared to levels that were last seen in 2007 and back home, interest rates have also risen significantly as seen from the Singapore Government Savings Bonds.
The implication of higher interest rates comes in two forms.
Firstly, higher interest rates will result in higher borrowing costs for both businesses and consumers. This will cause businesses to suffer from lower profitability while consumers will suffer from lower savings.
As a result, both the businesses and consumer will tighten their belt as they spend and invest lesser which in turn lowers economic activity and thereby further reducing businesses’ profitability and consumer savings.
This behaviour will result in a negative feedback loop which eventually will cause the economy to enter into a recession and if not managed will digress into a depression.
Secondly, higher interest rates will increase the expected return and attractiveness of fixed-income instruments as they now provide higher interest returns for investors.
This will end up drawing resources and funds away from riskier assets like stocks to safer fixed-income assets like your government bond.
As investors start to dump their stocks and buy bonds, the stock market will drop further and further which is what we are experiencing today.
Looking at the situation today, interest rates are expected to peak in 2023 before coming back down afterwards.
This essentially reinforces the view that the market will witness more pain moving into 2023 before bottoming as both the inflation situation and interest rates improve and stop increasing.
As mentioned earlier, I expect the markets to continue their relentless decline for at least the next 6 months as a result of the combination of an elevated inflation situation and a rising interest rate environment.
While the valuations of the US equity market have come back down from their long-term average while the Asia equity market is trading within the undervalued range, I expect the markets to remain depressed for the next 12-24 months until investors’ sentiment recovers.
As I’ve already done a detailed video on when the market will stop falling and start recovering, I will not be going into detail on the factors that are required for the market to recover.
Having sold half of our portfolio on July 2021, we’ve now started to re-invest the funds that were sidelined previously as the valuations of our investments are getting increasingly attractive as a result of the market decline.
While we’ve managed to deploy around 60-70% of our capital back into the market, I’m still = waiting for the prices to drop even further to reach my price target before deploying the remaining 30 to 40% of the funds left.
Looking at the behaviour of the markets, I suspect that prices would probably hit my final target entry price in late 2022 or early 2023.
That said, only time will tell.
Here at consulting Daniel, I invest based on a regionally diversified growth focus approach.
To eliminate the factor of emotion, all decisions will be guided by the outcome of my financial model which is built using 20 years of historical data and reasonable assumptions on future growth projections. Finally, the numbers will be stress-tested based on different plausible scenarios.
In times like this where the market is driven by pessimism, there will come a point in time when the market becomes severely undervalued as no investors dare to invest in it. Ironically, that is also the best time to invest as it is where market bottoms are formed.
That said, remember that we are not here to play the role of God.
The crux of our investment operation should not be based on perfect marketing timing. Instead, it should be built upon identifying the right investments with reasonable future growth potential and holding it for the long run.
This is also why we are investing using a hybrid approach where we dollar cost average every month and I will rebalance and position the portfolio on a lump sum basis when the situation calls for it – be it to be more defensive or aggressive.
Long story short, it will suck for a while but eventually, the market will recover and we will be fine.
If you have any questions or concerns about your investments, please PM me on Whatsapp or telegram and we can schedule a zoom meeting.
Stay safe and I hope to hear from you soon.
Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides:
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This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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