In this month’s update, we explore how the central bank’s firm and aggressive stance to fight inflation set off a broad asset sell-off. We also look at how understanding market cycles can help you ride through the rise and dips in the market with greater confidence.
- Central bank hawkishness
- Market cycles – riding through financial ups and downs
1. Central bank hawkishness
The Jackson Hole economic symposium was held on August 25, 26 and 27. This 3-day gathering of senior government officials and economic experts is highly scrutinised by investors and market participants because it is a forum where some of the most influential policymakers, such as central bankers, express opinions and sometimes make policy announcements that can have a material impact on asset prices.
This 45th edition was no exception. Fed chair Powell’s hawkish¹ tone, signaling further monetary tightening until inflation is tamed, triggered a global equity sell-off. The S&P 500 and the MSCI World total return indices declined 4% in August, with most of the sell-off happening in the wake of Powell’s comments at the conference. Bonds also sold off: the Global Aggregate index was down 2.6% and the ABF Singapore index was down 1.2%.
The AutoInvest portfolio return was flat (0%) and the Earn+ portfolio return was -0.18%. Mutual fund returns were mixed in August: money market funds (53% of the AutoInvest portfolio) posted positive returns from 0.15% to 0.19% while short-term bond funds (47% of AutoInvest and 100% of Earn+) posted negative returns from -0.20% to -0.16%.
While the majority of global central banks (including Singapore’s MAS, as discussed in our July 2022 article) remain committed to restoring price stability through tighter monetary policies if necessary, there are two notable exceptions: Japan and China.
The People’s Bank Of China (PBOC) eased its monetary policy in August, a move that singles out the country among mostly hawkish global central banks. The decision to ease was driven by unexpectedly weak July economic data: industrial production grew only 3.8% year-on-year (below the 4.6% market consensus), and retail sales also disappointed with a 2.7% growth (well below the 5% consensus). Moreover, job data did not signal any improvement, as the national unemployment rate was 5.4% (little changed from the 5.5% print in June) and the youth unemployment rate climbed to 19.9% (a fresh record) from 19.3% a month earlier.
2. Market cycles – riding through financial ups and downs
Some investors appear to “just know” how to invest. No overthinking, no sleepless nights. What might seem like “expert instincts” to us is actually knowledge, in particular, knowledge about how the market works. For example, the rise and dips in the market are not arbitrary, but part of the larger phenomenon called the market cycle.
A market cycle consists of economic trends within a period, changing market conditions that affect asset prices differently. In other words, these trends do determine your gains and losses.
Knowledge is power. Find out all about the unique phases of a market cycle to plan your investments more strategically.
¹ A “hawk” tends to promote tighter monetary policies due to concerns over inflation or an overheated economy. By contrast, a “dove” tends to promote accommodative monetary policies, such as low interest rates, to boost economic activity.