Excessive Noise in the Market

The Winter Nesletter was held off, in part because of the excessive noise in the marketplace and the need to have a clearer picture before putting pen to paper and fingers to the keyboard.

The last few months have been a pretty volatile period for share markets around the world. Adding to the downward movement of markets amounting to, according to the news, billions of dollars almost daily, we also have had a federal election with a campaign that was hardly uninspiring, a war in Ukraine, rampant inflation, massive increases in interest rates, and many other negative news stories, so it is understandable if we feel a little overwhelmed.

But where are we really at?

Inflation: 

This is apparently the core reason interest rates must be raised. Inflation is up, no doubt about that. But interestingly, the tight supply of goods and services is part of the story. Unemployment is very low, so it is hard for employers to find staff. Try ordering a new car and be prepared for a 12-month wait at least. Try ordering a new caravan and you get a similar story. So, the effect is that there are no deals to be done, no discounts on offer, full prices being charged and perhaps more for any of us who can’t wait or aren’t patient enough to wait for supply chains to be restored. This has an inflationary impact. This is not the full inflation story but it gives you an idea of the factors that can cause rising inflation.

The question about inflation is, where is it headed? The Queensland Government Budget for the 2022/2023 financial year provided some insight. The budget papers stated that after peaking at 5.25% in 2021/2022, inflation would fall over the coming 2 years to 3.75% in the 2022/2023 financial year and 2.5% for the following 3 financial years. Therefore, if inflation is the main driver for increased interest rates, then interest rates will not be increasing for long.

Interest Rates: Yes, interest rates are rising. But they are rising from near 0%, a rate that was never meant to be a long-term rate. The artificially low rate of near 0% was aimed at providing relief to existing borrowers as we all tried to cope with Covid and the lockdowns, and the resultant inability to undertake our normal income-producing activities. The cash rate today has risen to 0.85% – compare that to the 15%+ in 1990. In 2008 the rate was just over 7%. So interest rates today are exceptionally low and provide a great opportunity for borrowers to reduce debt rapidly.

Russell Investments produce a video each week called the Market Week in Review and this week’s video indicates that it is still possible for the US economy to avoid a recession.

The RBA last week indicated that they do not expect Australia to have a recession any time soon. The volatility in the markets has been caused by a number of factors, one of which has been the possibility of recessions, one of which has been the threat of rampant inflation and the resultant higher interest rates. These threats seem to be easing and the markets over the last week seem to have settled.

So, what has been the impact of the volatility over recent weeks. Let’s look at 2 funds:

Russell Diversified 50 Fund, which is similar to the Ventura Diversified 50 Fund: Over the 12 months to the end of May, this fund has achieved -2.6%, which includes a -3% performance in the past 3 months.

Russell Balanced Fund, including the Ventura Growth 70 Fund: Over the 12 months to the end of May, this fund achieved -1.2%, which includes a -2.5% return in the past 3 months to the end of May.

In essence, the message remains the same. The strategies we develop for Retirement Planning are for the long term and they work. We pay a lot of attention to minimising risk, and it is at times like these that these strategies demonstrate their value.

Hope this Winter Newsletter helps and makes some sense. Have a great day. Peter Jordan