The story so far: what’s happened in 2022
Bear with me as there is some complexity in explaining what’s happened this year, but it’s worth understanding.
1. Two powerful global disturbances are the root causes of current market troubles.
The first was a resurgence of the pandemic and governmental response to it, particularly in China. Lockdowns etc. continue to disrupt supply chains (the production and distribution of goods) so cars and food etc. aren’t getting to consumers quickly enough.
Secondly, Russia invaded Ukraine. A key economic fallout of the war is its damage to the supply of essential commodities those countries specialised in such as oil, gas and wheat.
2. The result of these forces? Inflation
Supply-chain issues caused a significant increase in prices, as demand is high, but supply is reduced. They've risen sharply and persistently, led by petrol and food. In the past year prices have increased 5% in Australia and up to 8% in other developed countries (in the US they’re rising at their fastest rate in 40 years).
This is a very significant rise. And one key result is that economies are expected to slow, so much so that in the US a potential recession in early 2023 is now forecast.
3. To fight inflation, interest rates are rising
To limit rising prices, public authorities such as the Reserve Bank of Australia are pushing back. The most visible way they're doing this is raising cash rates.
Recently they've been pushing rates up, and fast. That has shocked investors, who’ve been used to cheap money for the past two years. Cash rates are now 1.5% to 1.75% in the US and 0.85% in Australia.
(This has a flow on effect to other types of securities and the most directly impacted is bonds, causing prices to move rapidly.)
4. Rising rates scare investors causing sharemarket downturn
Investors are reacting to rising rates by selling down risky investments such as shares, which pushes down their value.
This downward revaluation is happening because firstly, higher rates may bring on a recession – there are signs this could be true – and secondly, shares are not expected to deliver higher returns making them less attractive.
This risk-aversion is most obvious in cryptocurrencies, a high-risk volatile investment category that has seen spectacular increases in value and is now in significant decline. Spare a thought for those that have sunk significant sums into this category, because while many have sold out, those that haven’t could be caught by major US cryptocurrency networks freezing withdrawals and transfers, citing "extreme" market conditions.