Long-term investors are reminded that short-term volatility is unlikely to have a lasting impact on their portfolios.
It was a tumultuous time for investors.
January ended on a high note in the US, but only after the NASDAQ-100 had its best 2-day rally since 2020, posting a gain of nearly 6.6% in just 2 sessions of scholarship.
This follows days when the tech-favored index fell almost 5% in a single day.
The news, while less extreme, is similar in Australia, which is down 6.5% in the past month of trading but has fared better in recent days.
Despite the resounding swings in values, industry experts are urging investors to think long term.
Why is the market so volatile right now?
One of the main drivers of stock prices in recent years has been extremely low interest rates.
In effect, low rates mean it is easy to pay off corporate debt and the opportunity costs of investing money in longer-term growth assets are reduced with lower rates.
However, as banks around the world begin to battle rising inflation, it’s likely that those ultra-low interest rates will be a thing of the past.
As Jody Fitzgerald, head of institutional portfolio management and solutions at Morningstar, recently pointed out, this can become a problem for the markets.
“A little inflation is actually good for markets because it reflects stronger economic activity, but there is a tipping point where central banks will have to respond by tightening monetary policy, which will eventually slow the economy. .”
“We seem to be at this tipping point,” Fitzgerald said.
What does this mean for wallets
Unfortunately for investors, rising interest rates will mean increased volatility.
“There will be volatility in the rates markets and we’ve seen that in the last month or so,” Fitzgerald said.
“That volatility will then lead to equity markets and also to currency markets.”
“Simplistically, when bond yields go up, stocks go down and that’s because stocks are discounted at a higher rate,” she explains.
However, the investor notes that it is not that simple, with the underlying dynamic potentially creating opportunities for investors.
“In this environment, growth stocks will revalue and we are seeing that right now through technology,” she said.
“But there are stocks that will do well during an inflationary period. Assets that will do well from an inflationary period onwards happen to be attractively priced.”
Issue for short-term investors
Morningstar is quick to point out that investors must earn inflation returns or they erode the value of their capital.
So, in a world with higher inflation, those who need their capital in the short term or retirees are negatively affected by higher inflation.
“These groups tend to invest more conservatively and the reality is that in a high inflation environment they will struggle to keep pace with inflation without taking on more risk,” Fitzgerald continues.
According to Fitzgerald, the other types of companies that tend to do well are companies with a “high degree of pricing power” because they can actually pass on higher costs to consumers.
It becomes less of a problem in the long run
Although short-term investors may have short-term problems, this problem will not impact long-term investors.
Indeed, they can ride out rising interest rates and weaker short-term growth in equity prices.
“If you’re in your twenties and maybe you won’t need that money for 30 years, you probably won’t have to focus too much on what’s going to happen in the next few years,” said Dan Kemp, Chief Investment Officer of Morningstar. .
Remember Winners Keep Winning
At a separate Munro Partners press conference, the message for investors remained the same.
Even in volatile markets, Munro Partners Chief Investment Officer Nick Griffin believes the stock price will ultimately reflect earnings growth.
It suggests that structural winners taking market share from incumbents will continue to grow even as shareholders rush for exits.
“E-commerce still takes a share of ordinary commerce, cloud computing continues to take a share of workplaces, the internet still takes a share of ad spend, and digital payments takes a share of cash,” he explains. -he.
As such, he points out that companies such as Google, Visa and Microsoft will continue to show strong structural earnings growth over the medium term, even if they trade at a multiple above the market average.