Weekly Market Overview | 04 February 2022

They say January is the toughest month in the financial world, but this year, volatility was the theme and it’s largely been driven by policy uncertainty in response to the temporary supply chain bottlenecks caused by the pent up demand following the decreased production levels during the various levels of the Covid-19 pandemic.

Global Markets take a hit

The beginning of 2022 finally saw the pullback that Global markets had been forecasting since the second half of 2021. U.S stocks were hit the most as we saw the Dow Jones, S&P 500 as well as the NASDAQ Composite Index approach bear market territory with a deep correction.

At its worst, the mostly tech-driven stock (NASDAQ) was down roughly 17% from the previous month, as compared to data from last year where all three indexes were sitting at an 18% gain.

This comes as a historic loss was seen this week when Facebook’s $237.6 billion fall set the record for the biggest one-day value drop in stock market history. The previous record for the amount of market capitalization lost in one day was Apple’s $182 billion loss in September 2020. While this may set off the alarm bell in trigger-happy investors’ minds, the seasoned professional knows that this is the time to wait and see.

The Culprit – Inflation

Whilst earnings season, Omicron as well as geopolitical tensions between Russia and Ukraine have added a lot of uncertainty and volatility to the global financial markets, it is no secret that inflation is the main culprit as well as the response that global monetary policymakers have laid out. The nuance though in this particular instance, is that this round of Inflation is driven by supply-chain bottlenecks and constraints, as a consequence of the huge shift in demand as we come out of the pandemic, not an economy that is in the ICU – so the traditional policy playbook will not apply here.

Investors and portfolio managers have had the task of preempting what effect these measures will have on the economy, while they synthesize earnings results from the final quarter of 2021 to conclude if indeed the current level of inflation we are seeing is short-term or if it will be sustained. In response, global monetary bodies are expected to make several rate hikes this year with the first being forecast for March, but what impact does this have on people on the ground and for the economy?

Well, the lower the interest rate, the more eager people are to borrow money from financial institutions to make big purchases, such as houses or cars, and on the flip side, higher interest rates mean that consumers don’t have as much disposable income and must cut back on spending. This is how inflation is rolled back, higher interest rates mean higher borrowing costs, which influences people to spend less money, which then makes the demand for goods and services taper off, and ultimately causes inflation to fall.

How to position for February

In Aluma’s view, a good portfolio is one that still stands strong even when the markets don’t. As opposed to exposing your capital to the volatility and short-term unknown variables that constitute the current economic climate, it would serve you better as an investor to sit tight and focus on building a portfolio that can go the distance and withstand the turbulence we are currently seeing.

While this is sound behaviour from a long term investment perspective, there are still ample opportunities for short term gains, and February is presenting the opportunity to take advantage of the pullback by “buying the dip” as its referred to in the new age of short term investing styles.

However, it’s pertinent to mention that it matters not which end of the spectrum you are on as an investor, focusing on diversification to spread your risk and creating a balanced portfolio is still one of the best investment approaches to take even in these uncertain times.

The Optimal Play

You could consider buying the dip or re-balancing your portfolio for the long haul.
Buying the dip is more for short term gains and can be taken advantage of with the proper risk management and selection of which markets to enter. But one must be cognizant of the increased volatility caused by the confusion over the supply-driven macro environment.

However, if you don’t have an appetite for volatility and uncertainty and simply want to take the “wait and see” approach while you re-balance your portfolio, you can access various investment vehicles at www.aluma.co.za to drive this measured long-term approach and it can be tailored to your risk appetite paired with built-in security for your investment.