…unusual…
In the course of 2021, Covid-19 slowly but surely lost its terror. The world (apart from China) opened up again, production ramped up, demand for goods and services picked up. However, the supply chains, which had been disrupted by the pandemic, were unable to keep pace with the huge pent-up demand on the demand side. The first signs of rising prices became apparent as early as the second half of 2021, and by early 2022 inflation rates and a freshening of monetary policy headwinds dominated the headlines. Even then, the financial markets saw dark clouds gathering on the economic horizon.
Russia's violent invasion of Ukraine reinforced this negative sentiment. On the one hand, the conflict and the Western sanctions fueled inflation (especially energy prices), and on the other hand, they put pressure on the already gloomy growth outlook. The out-of-control surge in inflation was followed by rising interest rates almost everywhere. The central banks tightened the screws: The US Fed was the first to do so, the ECB somewhat more hesitantly, and even the SNB heralded the end of the negative interest rate era. The yield curves increasingly flattened, i.e. the difference between longer and shorter maturities became smaller and smaller, in some places (e.g. in the USA) even negative. This, too, was a signal of recession or at least weak growth.
…volatile…
High inflation and rising interest rates had not been seen for a long time, and war in Europe was certainly not on the cards. This market environment was not only unfamiliar, but also increasingly uncomfortable. Inflation and economic concerns weighed on growth prospects, and rising interest rates weighed on the valuation of most asset classes. By mid-year, the result was a heavy loss almost everywhere. In the equity markets, interest-rate-sensitive technology companies suffered in particular - in other words, precisely those stocks that had set the tone in recent years.
Both equity and bond markets subsequently moved in step with rising and falling hopes of less rigorous intervention by central banks. The latter repeatedly reiterated their willingness to fight inflation, even if this would not leave the economy unscathed. Nonetheless, the financial markets staged strong recovery rallies at times (especially in October and November) - particularly when negative news arrived from the economic front. Bad news = good news: After all, all too negative consequences for the economy could encourage central banks to rethink. But central bankers remained consistent and disciplined. Despite these recovery trends, most markets were clearly lower at the end of the year.
…challenging…
Negative markets are nothing unusual per se. Even in the seemingly never-ending bull market since the financial crisis of 2008, there have been price setbacks from time to time (euro crisis, Brexit, Corona, etc.). If the investment horizon is sufficiently long, the portfolio sufficiently diversified and structured according to one's own risk profile, such phases should not pose a serious problem for an investor. However, 2022 proved to be very challenging in terms of diversification. As mentioned above, hardly any asset class was spared from the market turmoil. Just as most assets had benefited from falling interest rates in previous decades, they now suffered from their rapid rise. Diversification across asset classes proved extremely difficult. At the end of the year, for example, the global equity index was virtually on a par with the global government bond index (see Figure 1). This made diversification and risk management within asset classes all the more important.
