Market roundup: Cash rate rises, volatility continuesMarket roundup: Cash rate rises, volatility continues

This month, we’re joined by Brendan Doggett, Sharesies’ Australia Country Manager, Sherifa Issifu, S&P Dow Jones Indices’ Index Investment Strategy Associate, and Scott Phillips, The Motley Fool’s Chief Investment Officer in Australia.

What’s been happening in the Australian share market?

Brendan Doggett (Sharesies)

The big news in the Aussie market is that the Reserve Bank of Australia (RBA) raised its cash rate by 0.50% to 0.85%. The RBA noted that while inflation is lower than in other advanced economies, it’s higher than earlier expected. There’s also the expectation that inflation will continue to increase before declining back to a normal range next year. 

All of this news has impacted share market performance, which remains volatile. In May, Sharesies investors largely focused on mining and natural resource-related businesses on the Australian Securities Exchange (ASX). This is a common choice for investing generally in the Australian share market, but also especially so during periods of market uncertainty. 

Sherifa Issifu (S&P Dow Jones Indices)

Following May’s decline, the S&P/ASX 200 is back in negative territory for 2022, but the Australian bellwether could have fared much worse after being down as much as 6% mid-month before moving tentatively higher. The top percentile of S&P/ASX 200 shares performed better, with the S&P/ASX 20 outperforming the broader large-cap universe by 1%. 

There were a few bright spots among Australian sectors, with infrastructure and resources both rising 1%, while materials added 14 basis points (bps). Despite the rest of the market’s downturn, these areas have remained resilient due to unprecedented levels of planned infrastructure investment in Australia. The government has pledged $120 billion AUD of investment over the next 10 years starting in 2022-2023. 

Scott Phillips (The Motley Fool AU)

May finished with a 3% loss—the worst since January 2022 (although 3% isn’t exactly noteworthy, on a historical basis). Following its interest rate decision, the RBA’s commentary suggests there’s more to come as it struggles to get a hold of inflation—most of it ‘imported’ inflation thanks to soaring oil and coal prices, and supply chain challenges in China and the US.

The interest rate increases have investors reconsidering their appetite for ‘growth’ and loss-making companies, with future profits worth less in a world of higher rates and inflation, and concerns that unprofitable companies might find it tough to raise new capital. The ASX All Technology index was down another 8% during May, having lost one-third of its value over the last six months.

What’s been happening in international share markets?

Brendan Doggett (Sharesies)

Global markets continue to be under pressure from high inflation and rising interest rates, resulting in ongoing instability. For individuals, the cost of living is on the rise and consumer confidence is down. For companies, business expenses are increasing, as is the pressure from share price volatility. The question of whether a recession is coming is starting to pick up speed, including both in the US and New Zealand. 

In NZ, the latest data shows that inflation year-on-year came in at 6.9%, which is well above their central bank’s (RBNZ) target of 2%. Accordingly, RBNZ raised the official cash rate to 2.0% to try and tackle inflation. 

Sherifa Issifu (S&P Dow Jones Indices)

The S&P 500® was on the edge of a bear market but managed to stave it off, with a strong rebound in the latter half of the month. Energy led among large-cap sectors (up 16%), while real estate was down 5%. US small caps outperformed, with the more domestically focused S&P SmallCap 600® gaining 2%. 

The S&P 500 was aided in part by hopes that inflation may have peaked, as April’s core PCE, the Federal Reserve’s preferred inflation measure, showed a decline for the second month in a row.  The Federal Open Market Committee’s latest meeting indicated that the Fed was willing to be more hawkish to curb rising prices, but hinted at a slowing pace of rate hikes by September. 

Scott Phillips (The Motley Fool AU)

The issues impacting the ASX are largely global in nature at the moment, so there’s no surprise to see them playing out internationally. In fact, we’ve suffered less in comparison, thanks to our abundance of finance and resources companies, whereas many overseas markets (in particular the US) are now dominated by technology businesses. 

That was great when investors’ appetites for these companies were strong, but with that trend reversing, the US S&P 500 is down 13% this year, more than 2.5 times our 2022 decline of just under 5% so far.

Are there any key themes or trends you’re seeing?

Brendan Doggett (Sharesies)

Sharesies investors who started investing in recent years might be seeing negative portfolio returns now. They may have started investing when the markets were rebounding more swiftly—for example, following the downturn in March 2020. Recently, market movements have been more gradual, which can make the current conditions feel quite unpredictable and daunting. 

What’s interesting though, is that our investors’ top 10 buys have remained the same from the end of 2021, when it was still a bull market, to now. This indicates that many are persisting with their investment strategies, even through a downturn. If they have longer investment horizons, they might see this as an opportunity to invest whilst prices are lower with their long-term goals in mind. 

That being said, investing now might not be feasible for everyone. It’s important to be kind to yourself and think about what’s right for your situation—particularly if the economic changes have changed your personal circumstances. Where possible, think about whether there’s a chance to take a longer view. Consider an investment’s potential beyond this current downturn to help guide whether you really want to sell now and potentially lock in losses. 

Sherifa Issifu (S&P Dow Jones Indices)

My team has been closely watching the increasing correlation between bonds and equities.  When looking at the six-month correlation of daily returns between the S&P 500 and S&P US Treasury Bond Current 10-Year Index, last year’s moderately strong negative correlation is trending closer to 0. We’re seeing a similar pattern around the world: the S&P/ASX 200 and S&P/ASX Government Bond Index’s correlation moved to 0.01 mid-month. Equities and bonds moving in harmony with one another makes asset allocation more challenging for investors and has also weighed on the recent performance of the traditional 60/40 (combination) portfolio. 

During this time, multi-asset strategies and thematic indices that offer investors diversification have been of particular interest. One such recently launched thematic index is the S&P/ASX Agribusiness Index, a strategy that is designed to track companies involved in agriculture-related activities, which are a vital part of the domestic economy and a major export of Australia. 

Scott Phillips (The Motley Fool AU)

Strong attention is on technology companies as investors try to work out if there are more falls to come, or if they represent good value, which is part of the volatility we’re seeing. It’s not an understatement to say that traders are skittish—wanting to not miss out on the gains, but wary of being left holding the baby if shares continue to fall. Long-term investors don’t need to play that game, but our emotions can still be whipsawed by the results of the trading frenzy.

The ‘work from home’ movement is on investors’ minds, as Elon Musk orders all of his staff back to the office. Investors with an interest in workplace culture and productivity will be watching closely to see if other companies take the same approach. Commercial real estate investors might be hoping it’s a view other companies take, as many offices remain under-occupied.

And, of course, all eyes remain on interest rates, here and around the world. The rest of 2022 could continue to be a rocky road, but that doesn’t (necessarily) mean we’ll be in for more losses—just that a seatbelt and a cast-iron stomach might help!

Wrapping up

That’s all for this month’s roundup. If you’re on the lookout for more resources to help you learn about investing, make sure to check out our Learn articles and subscribe to our Lunch Money market newsletter. 

Scott Phillips, The Motley Fool Pty Ltd (The Motley Fool), Sherifa issifu and S&P Dow Jones Indices LLP (S&P Dow Jones Indices) are not associated with Sharesies AU Pty Ltd or its related companies. Views expressed by Scott Phillips, The Motley Fool, Sherifa Issifu and S&P Dow Jones Indices are their views and Sharesies does not endorse the views they represent. If any financial product or stock has been mentioned, you should obtain that product's disclosure documents prior to any decision whether to acquire the product.  Information provided is general only and current at the time.