Markets freaked as shares fell

Well it’s been a hell heck of a year…

Inflation is back with a vengeance, 30 or 40 year highs depending on which economy we’re talking about.  Energy prices are up, partly because of supply shortages ex-Russia but also with the Western world’s accelerating efforts towards green-energy transformation.  Businesses cannot get necessary supplies as production difficulties continue mainly because of labour shortages.  Our unemployment rate – if you can believe the stats – is just 3.3% which economists say is structurally unsustainable.  Interest rates have spiked all around the world as Central Banks everywhere seek to shrink consumer spending in order to dampen this resurgent inflation.  The Official Cash Rate in NZ was 0.25% in August 2021 and is currently 4.25%.  And the Central Bankers are all worried, rightly so, about stagflation:  a nasty combination of rising prices but a stagnant economy – how do we avoid let alone get out of that?

So unsurprisingly, share markets have been freaking out.  From their highs around a year ago now, we have seen declines of up to -30% in some markets notwithstanding some rebound over the past couple of months.  Our top to bottom here in NZ was -17% for the NZX50 although the 12-month decline has been trimmed to just under -10% with the relief rally over the past couple of months.

If you thought the good old housing market was immune then think again.  OneRoof reports that average property values across NZ are down -7% since February this year, a horrible 10% decline in Auckland since the peak and a whopping 18% drop in Wellington.

Our little Kiwi dollar for so many years buying lots of greenbacks, euro and aussies – sheltering us to some extent from underlying inflation – had a tough old time.  As recently as March this year the NZ dollar bought 70 US cents but only 56 US cents in October.  She’s now thankfully flying a little higher back up to 64 US cents.

With all of this, it is little wonder the mood out there is a touch gloomy and it is not unexpected that the most recent business and consumer sentiment surveys are not great:  The ANZ Roy Morgan survey of consumer confidence in November sees the measure bumping along at all-time lows with the bank predicting this to deteriorate further in to the new year if job losses begin to occur.  The ANZ Bank’s business confidence survey is similarly worrying posting all-time lows with the bank commenting that the index is “bouncing around dire levels”.

So what’s the outlook for next year and what is on the horizon to hopefully make all this go away and for things to get better?  I am sad and sorry to say, not much.

Inflation won’t abate for a while, there’s too much cost pressure across the board, with the ANZ noting in its November survey that businesses “inflation expectations hit a fresh record high”.

Labour supply will stay tight until immigration really frees-up meaning it will remain difficult for business to staff-up properly for a while yet.  Layoffs might alleviate this tension to some degree.

It looks as if interest rates will stay high for a while:  Reserve Bank Governor Adrian Orr is predicting the Official Cash Rate will rise to 5.5%.  After helping inflation along over the past couple of years with cheap and printed money, Governor Orr last week told us to “cool our jets” when it comes to spending over the next year or so in order to dampen runaway inflation and added “we are sorry that New Zealanders have been buffeted by these significant economic shocks”.  Make no mistake, the RBNZ is actively engineering a recession – read my stagflation comments above.

And if the OCR is going to 5.5% you can bet your bottom-dollar that residential mortgage rates will go above 8%.  This spells very bad news for mortgage holders over the next couple of years if not longer as higher mortgage servicing costs will coincide with high food, fuel and utilities bills indeed most other costs all going through the roof.

There can be no silver bullet in the form of some sort of cost of living assistance and/or additional Government spending as the cupboard is looking increasingly bare – deficits must come to an end at some stage – and the perhaps reluctant acknowledgment that spending upon spending will likely make inflation even worse.  Of course, political imperatives in an ever-important election year might outweigh the economic pragmatism and discipline, we will see.

And any potential tax relief one may have been hoping for is gone.  A Labour/Greens Government has not and will not reduce taxes (which by the way the annual tax take is now around $50 billion more than it was five years ago!) and the National Party recently announced a review of its tax policy in the wake of current inflation levels, OCR increases and the recessionary outlook.  Potentially lowering the 39% marginal personal tax rate “…is something I really want to think about because … in this environment, the situation has changed big time. Big time,” said Leader of the Opposition Christopher Luxon.  We all know that’s political-speak for it’s gone!  Only tax bracket indexation offers some hope of a lower tax burden in the future with that remaining in the table from the Opposition – at this stage.

So it looks like tough economic times for a while yet…

But, the good news for investors and Kiwisavers is that share markets know all of this and in aggregate tend to be pretty good at factoring all such news and views in to share prices.  That’s why 2022 has been such a tough year for markets, digesting and pricing all of this bad news.  But markets have adjusted, interest rates are up and share markets are down, currencies have re-aligned and it is hence possible that we’ve borne the brunt of the correction and we may now have seen the worst of things.

The other bit of good news is that markets do tend to rise over time – the broad S&P500 index in the US averaging some +9% per annum, over the past forty years.  This long term gain comes in spite of the share market crash in 1987 (the US Dow Jones fell nearly -40% in less than one month), the Asia Crisis in the mid-1990s, the tech wreck around 2000, the GFC in 2008 and the Covid-crash a couple of years ago.  So stay the course with your investments, and take opportunities where they arise and make sure you get robust, sensible financial advice:  time and the markets are your friends.