2022 has been characterised by red hot inflation, rising interest rates, and falling markets. The world’s largest index, the S&P 500, has fallen 14% year to date. But before it rebounded in July, the shares reached a low of $3,636, marking a 23% year-to-date loss. Over the course of a year, the index has fallen 8%. Across the pond the situation isn’t nearly as bad, with the FTSE 100 down 0.01% for the year. But this still highlights its stagnant returns.
However, since July, things seemed to have been picking up. So, is now the right time to be investing in the stock market? Or should I be searching for safer ways to grow my capital? Let’s take a look.
The year so far
As mentioned, the reason markets have been suffering is tied to the macro economy. Inflation has been reaching record figures in the last few months, caused by a combination of supply bottlenecks, Covid-19 government intervention, and the Russia-Ukraine crisis. In July in the US, inflation reached 8.7%, and in the UK, it reached 10.1%.
The way that central banks are controlling this sky-high inflation is by raising interest rates. Both the UK and US have hiked their rates. When rates rise, people are more likely to keep hold of their money, as they can earn a higher risk-free rate. This deters them from buying speculative assets like stocks, and stock market valuations usually take a hit.
One of the main reasons that markets have rebounded since July, is the news that US month-on-month inflation fell between June and July. This signified that inflation was coming under control and seems to have restored investor confidence in markets and the wider economy.
However, things are far from plain sailing. Energy prices are still soaring, which is keeping inflation high, and putting pressure on businesses around the world. What’s more, Citi recently announced a forecast of 18% inflation in the UK by January. It also highlighted it expected an interest rate of between six and seven percent to be enforced to control this. If these figures are correct, the UK economy could plunge into recession.
Is now the time to invest?
The good news about the stock market is that there are shares that perform well during recessions and times of economic turmoil. ‘Defensive’ industries like supermarkets, telecoms, and high-dividend stocks are usually a good play, but still carry heightened risk.
As for myself, I’m on the lookout for bargain companies with established reputations. Stocks that are beaten down by negative market sentiment, but still have solid underlying fundamentals. Anything other than such stocks I’m going to steer well clear of. Although the markets have seen a slight rebound, there’s no telling how inflation and interest rates will develop over the remainder of this year. However, I still think that investing in stock is my best bet at building long-term wealth, and as such I will still be investing during this turbulent period.
