The words ‘don’t panic Mr Mannering’ spring to mind as I watch UK inflation seemingly reach an all time high.This year we’ve felt the impact of energy price increases and higher bills at the supermarket with less in our trollies, but what’s really going on behind the scenes, and what can we expect as we approach the end of 2022 and the start of 2023, not just for shopping trips but with our finances generally …
The chart shows the annual inflation rate in the US for 2022, and as you can see, it has now fallen for four months in a row. Inflation looks like it peaked in the US at 9.1% and it is now moving back down, sitting at 7.7% as of October. Many of the drivers of higher inflation are now reversing: energy, petrol, electricity, food, and used car prices are all falling in the US. When these figures were announced, we saw stocks soar on the back of a better-than-expected inflation report. So, why the big reaction? Falling inflation is likely to lead to less pressure on central banks to raise interest rates, and, as we all know, rising interest rates reduce companies’ profits, as they must pay more to borrow. Markets are now expecting fewer interest rate rises and less pressure on company profits, so stocks rose to reflect this.
The US tends to book the trend in terms of what happens next in Europe. So let’s have a look at the UK, which in October actually hit 11.1% inflation, the highest since 1981:
The Bank of England are projecting that the UK is also peaking and is expecting inflation to start falling. This would make sense after seeing inflation drop in the US for four months in a row.
Let’s take a closer look at what has contributed to the increases this year …
It’s interesting to see where the biggest rises are, but I also think it’s important to put this year’s inflation rises into perspective. The chart below tracks UK inflation from 1960 to date. Thankfully we’re nowhere near the highs of the 1970s …
Looking towards 2023 …
It’s official, 2022 has been the worst year for the S&P 500 in more than a decade. But if you take a long-term view, years like this are not normal or typical … they actually bring excellent long-term buying opportunities. If the Fed manages to get inflation under control and navigate a soft landing for the US economy, analysts say 2023 could be a much better year. The recent fall to 7.7% is suggesting the Fed’s war on inflation is starting to produce victories, but we do still have a long way to go to reach the Fed’s 2% long-term target.
Heading into 2023, investors are already anticipating lower inflation and expecting a Fed pivot. A pivot with a pause in interest rate increases should help earnings to rebound. But the good news for investors is that the stock market is forward-looking, it prices in economic rebounds and earnings growth far in advance. The Fed slowing and eventually ending rate hikes will be bullish for investors in 2023 and should help the stock market.
My view?
Three things have killed the stock market in 2022: high inflation, which has led to big rate hikes, which has slowed the economy. I believe between inflation, rising interest rates and the threat of recession it’s a scary world for investors right now, and the effect that has on market sentiment will not help stock markets in the first half of 2023. Experts agree that there’s more volatility ahead.
However, those same three things are likely to reverse course in 2023, and as they do, stock markets will reverse course too, and go from crashing to soaring. With a well diversified portfolio, including investment in sectors that have greater earnings power such as energy, technology and healthcare, I can see a light at the end of the tunnel in the second half of 2023. With a potential Fed pivot and an averted economic downturn, stocks should rebound vigorously. Stock markets are set to soar next year in the same way they have after previous bear market crashes, such as 2021 (+27%), 2019 (+29%), 2009 (+24%), and 2003 (+26%).
The key is to make sure your portfolio is well positioned to take advantage of the current discounts and growth when it comes. Now is the time to buy equities, ahead of that reversal. I’m not saying we’ve hit THE stock market bottom. But I am saying that given the current macroeconomic trends, buyers of equities today are giving themselves the potential to be handsomely rewarded in 12 months.
If you have a pension or investment and are wondering whether your portfolio is sufficiently diversified, please contact us and we will assess it’s potential to offer you the returns and/or income you are aiming for. This service is free of charge and without obligation.
Speed Financial Solutions are a highly qualified and regulated financial services provider looking after clients throughout Spain and the UK. Established in 2010, we provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your financial planning.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
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This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
28 November 2022
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