Markets, after rallying strongly from June lows, have begun selling off again following higher-than-expected inflation readings in the US
Markets, after rallying strongly from June lows, have begun selling off again following higher-than-expected inflation readings in the US and continued hawkish commentary from central bankers (with the RBA head arguably a recent exception). Both short and long-term bond yields have responded and have pushed above recent highs, and now stand at the highest levels in over a decade.
As was the case in June when volatility was at its peak, it is important in these periods to remember that investors’ emotions are often their worst enemies, and that historically long-term returns have been far higher after significant selloffs. There is nothing unique about what we are seeing: higher interest rates are leading to appropriate re-ratings of all asset classes as the present-day value of future cash flows are marked down. This is no GFC or COVID sell-off but a healthy part of the economic cycle, and it is far more appropriate to be looking at recent events as a potential catalyst to become more aggressively positioned, just as the highs set last year should have ideally been seen as an opportunity to become more conservatively positioned.
Investor emotions will always mean that selling when markets are falling and buying when markets are rallying is the most natural inclination, but if you take a step back it’s obvious that buying low and selling high are far more appropriate reactions when one can take out the emotional aspect of investing. And at least in the short-term, we have an excellent blueprint for when markets will turn around as we saw just that in July and August as it appeared that inflation and interest rate expectations were peaking. While that peak has been pushed out as data have surprised to the upside, there will come a point when inflation peaks, and markets will have rallied a long way before inflation returns to central bankers’ preferred ranges.
