In his year-end market update, Rana Chauhan, Counsel’s Chief Investment Strategist, reviews the year in the markets and how rising inflation became the focal point of Central Banks’ policy decisions.
Rana traces the roots of the current inflation surge back three years to the beginning of the COVID panic when money was chasing goods and services during a time of diminished supply. Inflation was further fueled when the war in Ukraine caused the price of oil and gas to rise precipitously which in turn embedded inflation deeper within the global economy.
Central Banks initially believed that rising inflation would be transitory and were caught off guard when the Ukraine war broke out.
That sparked Central Bankers to begin raising rates aggressively leaving financial markets in a state of disarray, confusion, and uncertainty. This helped set the stage for a once-in-a-generation financial event where stocks and bonds both ended the year in negative territory - a result that has only been experienced twice before: once in 1931, and again in 1966.
The good news is Rana now believes we are starting to see the light at the end of the tunnel. Today’s higher interest rates have increased the cost of borrowing money which brings down demand, which in turn leads to lower inflation.
The economy is slowing, and we can see the signs in falling commodity prices, car prices, and in the housing markets.
Furthermore, Central Banks are beginning to slow the pace of rate hikes as data on inflation confirms it is beginning to return to its targeted rate of 2%.
However, as investors, we are not out of the woods yet. An economic recession is projected in 2023 for North American economies that many feel is inevitable sometime in 2023. In fact, this may be the most predicted recession in history. If one does occur, many believe it will be relatively mild and short-lived as employment remains strong, and many corporations remain well funded.
To manage through this tough period in the markets, Rana suggests that this is not a good time to make significant changes to your investment strategy. History tells us that making changes to your investment strategy at this stage in the economic cycle is tricky at best and rarely works in your favour. The best course of action is sticking to the financial plan and perhaps discuss a dollar-cost-averaging investment strategy with your advisor.