Written by Ivan Fletcher
What Have I Learned This Year?
Reserve banks are predictable but share markets are definitely not. Whilst share markets have been up considerably since the end of October (S&P 500 up over 10% for the month of November) both the S&P 500 and the All Ords Index are still just short of the market peaks 2 years ago – Christmas 2021.
Don’t rely on the banks to keep your interest rate competitive, it’s just not in their corporate nature.
Yet again we are experiencing large discrepancies in bank behaviour when it comes to lending rates. When I reviewed my current mortgage rates a year ago – the bank wouldn’t budge, yet this year they dropped my home loan by 0.6% when Hudson Finance team repriced the loan (same bank). My point is that banks are constantly changing their lending policies on new business and also existing customers. The best way to be up to date is to check in with your broking team at Hudson.
Last Year’s Prediction – The Turning of the Worms and Patience
The one thing that is abundantly clear at the moment is that the key Reserve Banks of the world (such as our own RBA and the USA Federal reserve) will keep hammering at interest rates until Inflation starts to ‘turn’. The key point here is a direction change (with the inflation worm turning and starting to decline). Think of this like you would with the turning circle of a large truck, it will take time and patience for it to come around (especially in the USA), but once it has … the tune will change.
The Reserve Banks will not need to keep raising rates if the data starts to reflect inflation statistics reversing. We have already seen the RBA drop down to 0.25% in the last couple of moves (after starting at throws of 0.5%). The next logical step is to stop all together once that ‘worm’ has turned. Just as it took a couple of years to wake inflation up from the slumber of being well below the benchmark 2% to 3% range, it will now likely take 1-2 years to put it back to sleep, but as long as it is coming down the RBA will put the hammer away and likewise the share markets will start to rejoice and yet another worm will turn – “the bottom of the current BEAR market”.
I expect that Australian inflation will reduce quicker than that of the USA as interest rate rises here have a faster impact than in the USA and perhaps an explanation why USA might dunk into a recession as the worms turn.
Volatility will continue as mixed data comes through on how inflation is tracking and whilst we are currently well up on the June 2022 market lows (i.e. your 30 June 2022 super balance) we may see those lows again (and possibly even lower) before the worm has finally turned. Just to demonstrate how the share market responds to the turning of the Inflation worm. On the morning of 11 November 2022, we awoke to the news that the USA markets were up 5.5% overnight which was the largest daily gain in 2 years – what nobody heard that? Well it happened and it was linked specifically to investors gaining confidence when inflation data came out below expectations, and guess what – Jobless data came in higher than expected – is this a premonition of what lies ahead?
Inflation – I did say it would take 1-2 years to put the inflation giant back to sleep. We are definitely under way. Locally in Australia Annual CPI inflation was 5.4 per cent in the September 2023 marking the third consecutive quarter of lower annual inflation and down from the peak of 7.8 per cent in the December 2022 quarter. However we are topping the list of headline inflation rates in the world’s 15 largest advanced economies). The USA inflation however has turned much quicker than I expected with an annual inflation rate of 3.2 per cent (October 2023) down from last years 30 year high of 7.8% – the worm has well and truly turned.
Volatility has been high as expected as the market continued to roll with the feedback from central banks as the inflation data rolls through.
Prediction for Next Year
Interest Rates – Following on from my predictions from last year, the turning of the inflation worm is the key for all else. I expect to see 2024 to now see the interest rate worm turn for the better. In the last 6 months Australia has had just one rate rise of 0.25% compared to the previous 6 months which had 4 rate rises for total of 1.0% and the 6 months prior to that leading into Christmas last year saw 6 straight rises totalling 2.25%. Provided inflation data continues in a downward direction we may well have seen the last rate rise in November 2023 (but lets brace for one more). The market commentary is about interest rates staying higher for longer so I anticipate rates will hover at current levels for a while. By the back half of 2024 we should see the rhetoric from the RBA talking about rate cuts (even if they don’t immediately deliver). As for the share markets, the commentary amongst economic commentators is that the USA market is overvalued, however this seems to be heavily tied to the “Artificial Intelligence” industry.
Returns on Long Term bonds (the fixed interest component of your super and pension portfolios) will improve considerably. A peak in the interest rate cycle is the perfect match in terms of investment cycle for bonds.
Share market volatility will continue into the new year and it would not surprise to see a market adjustment some time soon after the rallies we have seen this last month or so, however as the year progresses with the absence of any new disruption (such as outbreak of a new War or significant escalation of current conflicts) we should see share prices surpass the December 2021 highs and an improvement in those super balances – but you may need to be patient a little longer.
Final Word for 2023
I said last year that PATIENCE was the key to 2023. This has been the year we have had to tighten budgets to cope with mortgage stress and hold our nerve as share markets have roller coasted only to be in the same place as they were 2 years ago. We will need to maintain tight control on those budgets and continue to be patient as the economies of the world get a little closer to some sense of normal in regards to inflation and interest rates and economic growth.
Avoid the temptation to make knee jerk moves after a couple years of frustration (rising mortgage costs and floppy investment returns).
Continue to be kind to one another and celebrate the opportunity to connect with family and friends. As always, but especially this time of year, if you see someone without a smile, give them one of yours.