You may have read about the areas investors will be watching closely in 2022 in our article last month. If so, you probably also noticed that January did indeed turn out to be a bumpy start to the year.
Here’s what happened, and why.
The stock market’s fear gauge soared to new highs
Wall Street, in particular, found itself in choppy waters at the start of 2022.
As of 25 January 2022, US stocks recorded three consecutive weeks in decline. This was caused by concerns of how the Federal Reserve (Fed) may tighten monetary policy, with investors having to factor in more aggressive approach than originally planned due to persistent higher levels of inflation.
This uncertainty sent the market’s fear gauge, the Cboe Volatility Index, up nearly 100% year-to-date.
A brief overview of the Cboe Volatility Index
The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index.
Derived from the prices of the S&P 500 index options with near-term expiration dates, the VIX generates a 30-day projection of expected volatility.
Volatility is often seen as a useful way to gauge market sentiment and the degree of fear among investors.
UK and US inflation jumped to their highest annual rate for 30 and 40 years, respectively
With inflation at its highest level in decades, interest rate hikes are now being priced into markets. Such high levels of inflation tend to affect the valuations of growing businesses.
Currently, investors are weighing the longer-term impact of higher borrowing costs and higher prices on the earnings potential of growth-based businesses. This means that tech and growth stocks have suffered a number of setbacks since the turn of the year.
Meanwhile, the opposite is true for value stocks, which will typically outperform when inflation is high and interest rates are increasing. Accordingly, value stocks, like banks and energy firms, performed well over the first few weeks of 2022.
The Fed gets heavy-handed
As mentioned in last month’s article, while it was already apparent that central banks would need to maintain a “careful balance between keeping inflation expectations under control while allowing support for economic growth,” US stocks and bond prices dropped even lower in late January when the Fed’s Jay Powell set out intentions to increase US interest rates in March.
This rate rise will mark the first increase in US interest rates since 2018.
In January, the Fed’s policymakers released projections that implied there would be three interest rate rises in 2022. In early February, this projection was revised up. It’s quite possible that we should now expect five rate rises during the year. A pretty drastic change to expectations in a very short space of time shows how important it will be for the Fed to get inflation back under control.
Markets moved considerably lower off the back of such news and shows how there is still a degree of nervousness around monetary policy and further evidence of why policymakers must tread carefully.
Consumers globally are facing higher prices in general. You will have noticed it when filling up your car or shopping in the supermarket (within the last 12 months, the price of milk has risen by more than 8% according to the ONS).
Higher interest rates could ease some of that pain. However, rate rises are a double-edged sword that can also limit economic activity, which in turn can have a knock-on effect for investment
Protecting the downside as pockets of volatility persist
Inflation and rising interest rates and the anticipated monetary policy changes will be a topic of conversation for the remainder of the year. Certainly, in the short-term markets will remain volatile as investors adjust to a new higher rate environment.
However, with changes comes opportunity and as markets work their way through this transitional period, we believe Bowmore’s investment portfolios are positioned to benefit from the economic environment moving forward.
Portfolios have avoided a significant part of the recent equity drawdowns due to weightings in alternative assets, such as property, hedge funds and commodities. Such alternative investments are designed to diversify returns and help protect funds in times of stress.
Portfolios also currently have significant exposure to the UK and more cyclical firms, which have outperformed on a relative basis.
Get in touch
Bowmore Asset Management specialise in building and managing investment portfolios for private clients, trusts and charities. Our primary aim is to help you achieve your investment goals.
If you want to ensure that your investment portfolio is ready to perform against unpredictable volatility while aligning with your financial goals and appetite for risk, get in touch.
Email email@example.com or call us on 0203 617 9206.
The value of your investments can go down as well as up, so you could get back less than you invested.
Past performance is not a guide to future performance.
Bowmore Asset Management Ltd is authorised and regulated by the FCA.