TIME TO SPRING CLEAN YOUR PORTFOLIO?
Mark Lister, 2 September 2022
After a very difficult first half of 2022, global sharemarkets staged a strong comeback during July and most of August.
While it was pleasing to see optimism return, the path ahead was always going to be a volatile one.
We got a taste of that last Friday, when Federal Reserve Chair Jerome Powell reminded financial markets the central bank wasn’t done yet.
He poured cold water on the suggestion the Fed would reverse course anytime soon, noting that restoring price stability would require "a restrictive policy stance for some time.”
He added that while higher interest rates will bring down inflation, they will also "bring some pain to households and businesses.”
That saw the Dow Jones Industrial Average fall about three per cent, the fourth worst day in the past two years. The weakness continued into last week, stopping a two-month rally in its tracks.
At one point in late June, the S&P 500 in the US was down 23.1 per cent for the year and our NZX 50 index was 18.8 per cent lower.
We then saw a very strong rebound from June to late August, with the US market bouncing 17.4 per cent and the local market recovering 11.9 per cent.
Sharemarkets have given some of that back over the last fortnight, although prices are still well above the June lows.
US shares are currently down 16.4 per cent this year, while the local market is 10.6 per cent lower.
If we account for the favourable moves in the NZ dollar (a lower currency boosts the return from international markets), US shares are down just 6.9 per cent in 2022.
Ironically, signs of slowing economic activity helped fuel the more upbeat sentiment in July and August.
Cracks in the global economy were perceived as good news, on the basis this would deter policymakers from moving too quickly for fear of causing a downturn.
That’s starting to look like wishful thinking, with central banks more focused on dealing with acutely high inflation.
A weaker global economy might simply add further risk to the equation, rather than giving policymakers an excuse to change tack.
There are some encouraging signs on the horizon, so it’s not all bad.
Commodity prices have fallen from their highs, pricing intentions from businesses have stopped getting worse and clogged supply chains seem to be thawing.
The international reporting season was comforting, with many quality businesses delivering resilient results. Most of the earnings releases we’ve seen across the NZX in recent weeks have been equally solid.
Nonetheless, it is a time for prudence and diversification, and investors would be wise to focus on quality assets and reliable income generation, with a defensive tilt.
For us here in New Zealand, September marks the beginning of a new season and some much better weather. However, since 1950 it’s traditionally been the weakest month of the year for US shares, by some margin.
That said, it’s also a precursor to what has traditionally been the most lucrative time of year for investors. November and December having been the two strongest months over the last 75 years.
For now, it feels like caution is likely to prevail. Powell’s speech a week ago was a timely wake-up call to optimistic markets, and this could be an opportune time for investors to do any portfolio spring-cleaning they have been putting off.