Satrix looks back at 2022. How did markets go from steep sell-offs to a two-year bull run? Here are the key events and insights driving today’s market optimism.
Summary:
- Inflation and geopolitical crises led to major sell-offs, causing high market volatility.
- By 2023, rate hikes slowed, earnings were strong, and China’s reopening boosted supply chains, fueling a bull market.
- Investors who held on through the dip saw massive gains. Long-term investing beats panic-selling every time.
Back to 2022
2022 began with the Russia-Ukraine conflict in February, creating uncertainty in global markets. After that, the sanctions on Russia disrupted supply chains and drove energy prices up. Inflation reached multi-year highs, with US inflation hitting 9.1% by June that year. This also translated into reserve banks being more aggressive with their rate hikes, chasing the surging inflation rates. High rates further translated into high-growth stocks showing high valuations and looking very expensive, which saw Tech stocks displaying sharp corrections in their market prices.
Geopolitical risks, reserve banks’ aggressive policies, a potential recession in the equity markets, and uncertainty in a high-inflation environment rattled investors, resulting in selloffs across major indices. The graph below illustrates these price corrections in rands from the end of December 2021 to the end of September 2022.
Figure 1: Performance of major indicators, 31 Dec 2021 to end- Sep 2022, in rands. Source: JSE, MSCI, Satrix
During this period, the rand weakened by 12.6% moving from R15.96 to R17.97 against the dollar, and internationally the oil price increased by 8% while the gold price was down 9.2%. Yields had increased significantly as the US Federal Reserve’s aggressive rate hikes throughout 2022 led to a rise in bond yields across maturities, with the 20-year US Treasury yield moving from 1.9% to 4.9% in the same period.
Two Years Since the Bear Market Low
To the end of October 2024, the markets have had an impressive two-year bull run. By the end of 2022, US inflation began moderating. The expected recession did not happen, with companies posting strong earnings - particularly in tech stocks, health care, and consumer goods stocks. Investor sentiment started to shift, and valuations became more attractive, resulting in anticipation that the rate hike peak was nearing – which it did in the middle of 2023. After three years of COVID-19 closures, China reponed borders in 2023, which improved supply chain issues and lifted commodity demand.
The graph below shows the two-year raging bull cycle, up until end-October 2024, leading to a massive comeback across the different major indices.
Figure 2: Performance of major indicators, Sep 2022 to end- Oct 2024. Source: JSE, MSCI, Satrix
In as much as there will always be volatility over short-term cycles, the above proves that long-term investing is better than speculation. Selling at the end of September 2022 would have meant that investors locked in their losses and would not have been able to participate in the recovery, depicted in the returns in Figure 2.
Moving Forward
US corporate earnings have been strong this year, and instead of only relying on the stocks dubbed the magnificent seven, the performance has been spread out across different sectors over the last six months (we see a 3% difference in return when comparing the S&P 500 and the S&P 500 Equal Weighted indices).
The US Federal Reserve also has a complex economy to look after, as they aim to reduce rates while keeping inflation in check as well as a looming US election which comes with its policy changes. The South African Reserve Bank (SARB) expects local inflation to remain around the mid-point (4.5%) of its target range.
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