Volatile 2022

Causes

1. COVID shutdowns

The decline in stocks can be partly traced back to COVID shutdowns that slowed factory produc­tion just as stimulus payments and other govern­ment spending pushed up demand for goods. Facto­ries could not keep up and supply chains snarled. With demand excee­ding supply, prices rose (most things in econo­mics get back to supply and demand). To avoid disap­poin­ting shoppers who were eager to spend, retailers ordered more goods. Shipping costs doubled and tripled, which fed into price increases.

2. War Russia-Ukraine

To make matters worse, Russia invaded Ukraine and the resul­ting disrup­tion in oil and gas supplies has pushed up prices for fuel and electri­city. That boosts costs for manufac­tu­ring, farming, and food. Russia and Ukraine are massive produ­cers and exporters of ferti­lizer inputs and grain.

3. Supply / Demand imbalances

So, supply/demand imbalances pushed prices up, creating infla­tion. In response, central banks around the world, inclu­ding the U.S. Federal Reserve, the ECB, and others, have been raising interest rates to try to push demand lower (to fight infla­tion). Lower demand raises the proba­bi­lity of a reces­sion and makes future corpo­rate profits less certain. That makes investors discount the value of those future profits more heavily.

4. Shift in spending from tangible goods to services

Then, as the pandemic was brought under control, consu­mers shifted from spending on things to spending on services, such as travel, dining out, etc. With the demand for goods falling, retailers cut prices. That is also hurting the outlook for profits, which is bad for stocks. So, stock prices are falling due to a sequence of events that have created high infla­tion and a great deal of uncer­tainty about future profits.

5. What about bonds?

Bonds generate income that usually acts as a “cushion” when stock prices fall. But bond prices are dropping by far more than the interest income those bonds provide. Why? Be – cause Infla­tion is forcing central banks to raise interest rates rapidly, and when interest rates rise, bond prices fall.

6. Gold as an infla­tion hedge?

Gold is often thought of as an infla­tion hedge (although histo­rical data shows other­wise). Gold pays no interest, so when investors can earn a guaran­teed, risk-free return of 2% or more by holding short-term govern­ment securi­ties, gold loses its allure. So, gold prices are decli­ning if real interest rates are rising. Additio­nally, Gold have suffered from U.S. dollar streng­thening.

7. How about real estate?

Real estate usually does fairly well when infla­tion rises because rents often keep up with rising prices. Nevert­heless, prices of listed real estate funds in Switz­er­land declined be – cause interest rates rose sharply, and because pension funds were forced to sell some real estate holdings as equities and bonds fell even more, to move back to their targeted asset alloca­tion.

8. The U.S. dollar’s strength

The U.S. dollar’s incre­dible strength against just about every other currency is contri­bu­ting to infla­tion in Europe and elsewhere. A strong U.S. dollar helps an Euro, Swiss franc and British pound investor, but the positive impact have been limited due to our defen­sive forex manage­ment.