June 2022 – Market Update

As you will be more than aware falling stock and bond markets along with the rising volatility which has gripped global markets since the start of the year has intensified in recent days.

Last weeks announcement of annual US inflation of 8.6%, the highest in 40 years, was the primary cause.

In the US

In response to the rapid inflation, the Fed has made it clear they want to reduce inflation down to 2% as they are concerned that the increases in cost of living require wage increases to compensate for the higher costs of living. The danger of course is that this becomes a wage price spiral which is where higher inflation becomes entrenched.

Energy, food, and services have all contributed to the rise in US inflation. Reduced supply and increasing demand factors are pushing prices higher. Regarding energy, there has been significant supply constraints due to the conflict in Ukraine along with greater demand as the US holiday driving season ramps up. Food prices have also been affected by the costs of production (increased fertiliser costs) and transportation. Services costs have risen as demand increases as the economy reopens and consumers recommence travel and other related activities.

In Australia 

This is not the case here in Australia, we have lower inflation rates for now and aren’t facing the same level of challenges. There has been a lot of talk regarding the increase to the minimum wage announced yesterday of 5.2% however it is important to highlight a) reflects only rising the minimum wage to keep up with the rise in inflation, not a wage increase in real terms and b) it only applies to the those on minimum wages where these households are likely to spend all of it on essential services.

International Equity Market Reaction

Markets that were already under stress prior to last week’s inflation rate, responded quickly and sold down further as the market reassessed company’s future earnings prospects in a higher inflation, higher interest rate environment. Falls in recent days have seen the S&P 500 move officially into a “bear market” (market falls of 20% or more).

Australian Equity Market Reaction

Both global markets and domestic factors influence the Australian stock market. Whilst earlier in the year the market fared relatively better to its overseas counterparts, market sentiment began to change following the April RBA meeting. At this meeting, the RBA began to suggest that rates may have to move higher as inflationary pressures were building. These market concerns were realised in the May meeting, when the official cash rate rose by a quarter of a percent, and then in June with the half a percentage rise.

Fixed Income (Bonds) Reaction

Fixed income markets have also responded to rising inflation and interest rates.

Recap: If yields rise rapidly (responding to higher interest rates), the value of a fixed interest investment falls. This is because the fixed yield on an existing investment, is now lower on a relative basis, and therefore considered less attractive, than a new investment which attracts a higher yield.

Australian and US yields have surged in 2022, with both 10-year Government Bond rates rising to well over 3%. In Australia the Ausbond Composite Index, which is the most common measure of the Australian Fixed Interest market, is down approximately 10.8% from the start of the year to 10 June, whilst the global equivalent, the Bloomberg Global Aggregate (AUD Hedged), is down approximately 11.5% from the start of the year until 10 June 2022. These are the largest corrections seen in this asset class in the last 40 years and eclipses the 1994 bond market sell-off.

What does all of this mean? 

We appreciate that the current environment looks concerning given falls in markets and likely further interest rate rises.

There is growing speculation around a short lived recession occurring globally which is simply when the economy ‘shrinks’ (rather than growing). Whilst this may be unsettling it’s important to note that the likelihood is that if it does occur it will be short lived and is mainly due to the short-medium pressure that have been discussed above.

There have also been reports comparing the current period to previous episodes of rising inflation and interest rates. It is worth examining two previous periods of rising inflation and interest rates. These two periods are the 1970’s through to the early 1980’s, and 1994. Whilst it is difficult to make direct comparisons as the global economy and markets have evolved since these periods, it is still worthwhile to identify similarities and differences which can assist in thinking about the market outlook.


In the 1970’s, economies were impacted by oil price shocks, causing inflation to surge. Geopolitical issues in the 1970’s were mainly responsible. As a result, central banks at the time were much more strident in taming inflation, and rates moved well into the double digits.

In the US interest rates reached 20% by late 1980. This resulted in the recession of 1981-1982, and US unemployment reached nearly 11% in late 1982. However, economies were much more rigid at that time and the rising inflation resulted in significant wage rises becoming much more entrenched. This is not the case today. As labour markets have become more flexible in recent decades the likelihood of wages increasing at the same rate is diminished.


The Fed also embarked on a series of interest rate increases primarily to ward off inflation in 1994. However, there are a few key differences with now. In 1994, whilst inflation was rising, it hadn’t risen to the current levels. Policymakers, however, fretted that a strong economy would translate into much higher inflation. The Fed doubled interest rates over a 12-month period to 6% – at one point executing a three quarters of a percent hike. The speed and degree of the rate rises took markets by surprise and resulted in significant drawdown in fixed income markets.

Current economic conditions today are more sensitive to interest rate movements, given higher indebted levels, an ageing demographic, slower population growth, and lower economic growth. Central banks are aware of these conditions and as a result, whilst seeking to reduce inflation, will also likely be conscious of the market impacts.

Importantly, we do see inflation likely moderating over the next 12 months. A range of factors particularly around supply side constraints such as ongoing Covid impacts particularly in China and energy prices have been key drivers in the current inflation numbers. We expect these constraints to ease in coming months. This in turn would likely improve the outlook for rates, bond markets, and equities.

In addition to Geopolitical factors listed above, we see that the current inflation environment has been largely caused by massive increases in the money supply just after the Covid crisis. Two and a half years later, the lagged impacts of those money supply increases are showing up in rising prices for goods, services, real assets and commodities. As the Covid crisis unfolded and the world controlled the situation, the growth rate in money supply was drastically reduced. This may mean that large increases in inflation this year may be followed by a moderation in prices in 2023 and beyond, as the lagged effect of those subsequent money supply decreases flow through next year.

What should we do then?

  • If you are worried, please call us! We are busy, but we will make time!
  • Remember, whilst the events are unique, the volatility isn’t an usual occurrence for a healthy and functioning market.
  • Although unsettling experience in the short term, equities will continue to be an important contributor to overall long-term returns.
  • It’s important to remember, time in the market is more important than timing the market
  • If we were to cash out of the market until things normalise, we would essentially be locking in paper losses now and then buying back in at more expensive prices, this will result in us going backwards.
  • The current ‘losses’ are only losses if we crystallise or make a change, if we ride the volatility out and give investments time to recover there wont be a loss.
  • If we are retired, remember the way we have structured your portfolio to ensure we have enough cash to ride out events like this.
  • If we are accumulating, remember as we are buying into companies at the moment we are buying into companies that haven’t materially changed but we are buying them at discounted rates, over the long run we will get rewarded for holding through this volatility.
  • When looking at recent performance, it helps to ‘zoom out’ or to put the current market losses into perspective

If you have any questions or concerns please don’t hesitate to reach out – alex@sfgadvice.com.au or 02 8488 8130.

Best Regards,