A Big Picture Look at This Year's Market Volatility

19 May 2022
Stephanie Leung
CIO Office

Here’s why markets are down and how our portfolios have performed year-to-date.

Conventional wisdom says that bond prices should move in the opposite direction to stock prices. This year, however, both the stock and bond markets have seen negative returns.

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On top of this, high inflation means that your cash holdings are steadily losing their purchasing power. Even crypto, which some investors saw as an inflation hedge, has fallen. In short, it’s been a tough year to be an investor.

Seeing negative returns on your investments can be frustrating and uncomfortable – it’s common to want to:

❌  reduce your dollar-cost averaging (DCA) amounts,

❌  change your asset allocation, or

❌  withdraw your investments altogether.

But market corrections are normal – and they don’t last forever. That’s why it’s important to stick to your long-term investment plan when markets fluctuate.

Our investment framework, ERAA®, added inflation protection to your portfolios at the beginning of the year. Because of this reoptimisation, our General Investing portfolios have outperformed their benchmarks year-to-date across all risk levels.

We go into more detail about our portfolio positioning and performance at the bottom of this article.

What’s causing the recent market volatility?

Inflation is at elevated levels globally

There are actually two types of inflation, and we’re seeing a bit of both:

  • Cost-push: prices rise when supply decreases - we’re seeing this because of supply chain disruptions due to the Russia-Ukraine war and recent COVID-related lockdowns in China
  • Demand-pull: prices rise when demand increases - we’re seeing this because consumer demand is returning in the rest of the world as social distancing requirements ease

The Fed started raising interest rates

In the US, inflation recently reached its highest level in four decades. And in order to fight inflation, the US Federal Reserve (Fed) has been stepping up its response and increasing interest rates. Market expectations about how quickly the Fed will raise rates this cycle – and whether that could drag the world’s largest economy into recession – have played a major part in the recent volatility.

The Fed started its rate hike cycle in March, and in early May it announced its first half percentage point rate hike since 2000. The central bank is expected to continue raising rates aggressively for the rest of 2022 - the federal funds rate is currently at a range of 0.75% to 1%, and current market pricing has the rate rising to around 2.75% by year-end.

Here’s some data to put the inflation and interest rate hikes in perspective

We may have reached peak inflation, but it’ll remain high

The market consensus is that US inflation will moderate from its highs in March over the rest of 2022.

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This is partly due to a higher year-on-year base effect, but also because price increases in some goods – exacerbated by pandemic-related supply shortages and the Russia-Ukraine war – are starting to slow. China’s COVID-zero policy could also help cool inflation. Its recent lockdowns have reduced its demand for industrial metals and raised optimism that commodity prices could be turning a corner.

That said, we still expect inflation to end the year significantly above pre-pandemic levels as steady gains in services costs – think rent or transportation – may keep the overall gauge elevated. Our new normal is shaping up to be an environment of higher inflation and interest rates than what we’ve been used to over the past 2 decades.

The Fed hiking rates isn’t a death knell for markets

A country’s benchmark interest rate is a key policy tool that central banks use to steer the economy. They raise interest rates to make borrowing more expensive and slow inflation, and lower rates to stimulate spending and boost economic growth.

In fact, you can see from the chart below that the US economy is coming out of an extended period of abnormally low rates.

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What’s more, a rate hike cycle doesn’t always spell doom for the stock markets. We analysed  stock and bond market returns after the Fed’s second rate hike in each of its previous hiking cycles over the past few decades, and found that:

  • 1 month later, declines in both the stock and bond markets have tended to be modest – averaging less than 1%
  • 1 year later, markets tended to bounce back and show positive returns
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So while markets tended to experience volatility at the beginning of a rate hike cycle, those who stayed invested through the market fluctuations saw their patience pay off.

We’ve positioned your portfolios for an environment of higher inflation and rising interest rates 

In January, our investment framework, ERAA®, added protection from inflation within all our portfolios:

  • It reduced allocations to developed and emerging market government bonds in favour of high-quality US corporate bonds and inflation-linked government bonds.
  • It reduced exposure to US consumer staples, US REITs, and US energy, which were trading at high valuations, in favour of higher allocations to US small-cap and financial stocks.

These changes worked out well. Year-to-date, they’ve helped our portfolios outperform their benchmarks across all risk levels¹.

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What should investors do during these uncertain times?

The most important thing you can do is, simply, stay the course. During periods of market volatility, investor sentiment can swing too far towards optimism or pessimism and cause markets to move more than what seems justified by their fundamental value.

Successful investors understand that markets tend to overreact and are more likely to keep their investing behaviour consistent amid any shifts in the market environment.

If you have enough money set aside for your near-term expenses, and have a healthy emergency fund, it makes it easier to let your longer-term investments ride through cycles of market volatility.

Even if you’re seeing negative portfolio returns, here’s what you should do:

✅  maintain your DCA amounts,

✅  keep your asset allocation if you’re comfortable with your current risk level, and

✅  stay invested

This prevents you from realising losses on money you don’t need in the near term. It also gives you the best chance of capturing an eventual market recovery.


¹Performance disclaimer:

Our same-risk benchmarks are proxied by MSCI World Equity Index (for equities) and FTSE World Government Bond Index (for bonds). The benchmarks we use have the same 10-years realised volatility as our portfolios.

Model portfolio returns are expressed in gross terms before fees, withholding taxes, and reclaims on dividends. They are provided only as a gauge of pure performance before other items.

Actual account returns may deviate from the model portfolios due to differences in the timing of trade execution (e.g. during the day vs close), timing differences and intraday volatility of reoptimisation and re-balancing, fees, dividend taxes and reclaims, etc. All returns are in SGD terms.

The inception date for portfolios with SRI 6.5%, 8%, 10%, 12%, 14%, 16%, 18%, and 20% is 19 July 2017; the inception date for portfolios with SRIs of 26%, 30%, and 36% is 16 August 2018; the inception date for the portfolio with SRI 22% is 15 August 2019.

Past performance is not a guarantee for future returns. Before investing, investors should carefully consider investment objectives, risks, charges and expenses, and if need be, seek independent professional advice.



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