Shaken, not stirred

| Your Financials

This must be the weirdest summer for a long time. It has to do with risk perception. One of the obvious reasons is Russia’s aggression towards Ukraine. This caused big disruption anticipation towards energy, sending inflation up at a rate not seen for 50 years, which triggers interest rates to go up. To top it up, there is a shortage of everything. Staff involved in travel or events have gone elsewhere, not feeling sufficiently protected by their employment in that industry type. Staff is also suffering from the Covid aftermath. If not directly related to their health than with the stress coping with shortfalls everywhere. Shortfalls caused by severe lockdown strategies in the world’s “machine room” China and a big vessel blocking the Suez canal for a long time.

No wonder investment markets tanked. Depending on which stock market you follow, the drop between mid-November 2021 and the first 3 weeks of June is roughly 25%. Terms like “bloodbath” have been used in the investment arena in the past 6 months on numerous occasions, not only regarding share prices but also in connection with notably government bonds (typically a safe haven for those with a more defensive risk profile).

The professional investment universe is not very impressed by what some call a correction of exuberance. The professionals point at the historic evolution of what happens on markets; it will bounce back! So inflation will go down, stopping the need to use interest rate hikes as an instrument to trim inflation, supply chains will be restored, and trust in the investment universe will prevail as always.

Running to the conclusion of this article: they are right. But … it will not be tomorrow, and it will take flexibility, maybe some hardship (which always touches the vulnerable first unfortunately) and stern decision making by politicians. That, dear reader, I find a lot to ask for. In many countries the unrest of policy consequences (climate, defense, etc.) together with short term uncertainty on income and safety is taking its toll. People’s tolerance is being put to a test in places where you would not expect that.

In part that has to do with financial loss being presented so frequently and absolute. Like there is no tomorrow for your capital to recover by the time you need it. But that is not true. In the graph below I have depicted, as an example,  Dutch inflation (left axis, in percentage points) and investment returns on the Amsterdam stock exchange (right axis, as a percentage) between January 1, 1983 and year-end 2021.


Inflation has moments it will peak, followed by (more, prolonged) periods of a lower rate. Inflation up to about 2.5% has only occasionally pushed investment returns down; when inflation reduced the stock market recovers at a higher rate than inflation. From a “mechanical” point of view it is therefore likely that recovery will come when we master the currently too high inflation.

I can only hope we will be able to convince the “restless” that adding fuel to the fire does not do their cause any good either, and that jointly removing obstructions to recovery is the fastest road to a healthier world.

On that note I hope you will be able to spend some quality time with your dear ones during the holiday season. They need it. You need it.