As we head into the second half of the year, the recovery in equity markets in 2023 has come as a relief after the woeful performance at the end of 2022. Below is a roundup of the year so far and a look forward to what might be to come in the remainder of 2023. Whilst the past does not predict the future, we can take some learnings to help us navigate future financial challenges. Understanding the intricacies of economic peaks and troughs can help educate us to remain calm in the face of future turbulence and will help keep us on the right path.
What’s happened?
In October 2022, the world’s largest stock market had declined by 25% over the previous nine months. During this time, investors were inundated with news about stubborn inflation, rising interest rates, an ongoing war in Ukraine, and fears of a coming recession. Not surprisingly, consumer confidence was lower than it had been in four decades. For the first time since 1999, the average forecast of “experts” was for another year of negative returns.
We now know that, with no apparent warning, the market has risen by over 24% from the October lows; the official year-to-date return is 16% at the time of writing. For everyone who remained invested, this equates to greater future financial security. Essentially, these rises are due to improved sentiment as market challenges still very much exist.
So why has sentiment improved? How have equities proved so resilient over the last 6 months, even with a crisis that threatened the US and European banking systems? The ongoing strength of the US consumer has had much to do with it. With wages going up, COVID savings at their disposal and a robust jobs market, people kept spending. Lower energy costs, pandemic savings and high employment levels have also meant that the UK and European economies did not slip into recession as expected. In fact, figures from the US last week showed that growth in Gross Domestic Product was actually much higher than expected, as the US economy grew at a 2% annual pace from January to March; a sharp upgrade from the previous estimate. Avoiding a recession thus far has instilled a growing confidence in the economy’s resilience.
What we’ve learned
While the exact market dynamics will never repeat themselves, we know that the patterns are formed. Reflecting on key lessons will help to shape and benefit our financial future. Here are three we believe are worth paying attention to:
Timing the market is a fool’s errand
Our minds are wired to extrapolate the present into the future. During a market crisis, we assume that further declines are inevitable. However, acting on this prediction by trying to time the market is futile.
People often withdraw even with clear evidence that the worst is over. Those who expected further declines after the trough in October and reacted now have a long road to rebuild their portfolio values.
The future is always uncertain
You could be forgiven for thinking that, having almost reached the previous market highs, the future must look brighter. You’d probably be surprised to find out that despite recent gains, the future is no more certain than it was eight months ago at the pit of the decline. Inflation is still a challenge, even in many developed markets, and we could still see further interest rate increases. The war in Ukraine is still ongoing. A recession is still expected by many. Take comfort that the biggest companies, with the best management, are actively thinking of new ways to overcome the current challenges.
Proactive planning is the antidote
While we are unsurprised about the market’s recent recovery, we do not know what the short-term future holds for global markets. Indeed, we never will.
Unsuccessful investors are continually reacting to current events. Our approach is to remain steadfastly focused on your long-term goals by proactively acting on a plan. The principles underpinning this plan are patience, discipline and rational optimism inspired by a long history of human ingenuity. We’re confident this approach will give you the best chance of lasting financial success.
Looking ahead
The second half of 2023 will surely bring us new and different challenges. Sticky inflation, immaculate disinflation and potential recessions do still pose a threat. As does the potential further increase in the Bank of England base rate. China’s economy looks set to grow as much as 5% but this is still not quite the roaring recovery once promised post-COVID Zero lockdowns.
Please note:
The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
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