War in Ukraine, market turbulence & your investment questions answered

The Australian (and global) stock markets have experienced a turbulent month and it seems like turbulence could be a trend set to continue for a little while longer.

If you’ve been following the news you will most likely be aware that Russia has invaded Ukraine with daily ramifications on global markets. But even before the war in Ukraine escalated, the financial press was already reporting graphs pointing upwards and downwards and headlines referencing a ‘market correction’. If you’ve been in Verve’s member hub recently to check on your Verve Super balance you may also have noticed a few ups and downs.

If you’re not used to following financial markets, and haven’t always checked in with your super balance regularly, these moments of market turbulence can feel particularly unstable. As I’ve written before, it doesn’t help that our financial press seems to loooove reporting when the market does steep dives, often not bothering to cover the story in the following days when it climbs back up again.

So, we wanted to break things down for you, help explain what might be going on, and most importantly help you answer that important personal question of “should I be worried?”. The good news is, if you didn’t even know that the markets were in turbulence, then moments like this also give a great opportunity for learning.

In a nutshell, here’s what’s been going on in the markets

Source: Google finance

Firstly, let’s put things in perspective: as of the date of publishing (8 March 2022), the ASX 200 – the index of Australia’s top 200 companies – is roughly back to where it was on October 1, 2021 and that’s slightly higher than where it was before COVID-19 struck Australian markets in mid-Feb 2020.

Perspective is important when we’re thinking about long-term investing, and the longer the perspective the better. Check out the graph below of how markets have responded to major crises in the past. You’ll notice that there have been periods of substantial drops in the past, but the fastest periods of growth have often followed these drops and the trajectory over the long term has historically always been up.

So what are investors thinking and why are prices of companies going up and down at the moment?

When we hear expressions like the “market has jitters”, “the market is spooked” or the “market is in turbulence” it’s important to keep in mind that financial markets, like supermarkets and car markets, don’t have thoughts, let alone feelings. So when we hear these phrases, what the media is really saying is that ‘investors’ have ‘jitters’, ‘investors’ are ‘scared’ or the ‘price of companies listed on markets are turbulent’. The financial marketplaces are actually functioning just fine.

In general, financial investors, particularly those that invest billions of dollars on behalf of institutions, like certainty. When global trends and future events seem relatively obvious, investors will make stable decisions. However, when there is significant uncertainty (as is the current situation), new pieces of news can send the price of companies soaring up or down. In addition, the murkier the outlook, the bigger the discount investors demand and the lower the price they are willing to pay. There is even an old saying on Wall Street (so we’ve heard) that ‘bad certainty is better than uncertainty’. And at the moment there are a number of elements of uncertainty that are driving concern and volatility.

The headline news: How might Russia invading Ukraine impact financial markets?

You may think that war breaking out on the edge of Europe could send markets tumbling for the long term. But actually, the relationship between war and financial markets is not so clear, even during major armed conflicts, financial markets have often operated relatively smoothly. In the initial phase of war when there is confusion about what will happen markets tend to drop, only to recover once a ‘stable state of war’ emerges. Some economists are arguing that investors have been taking the likelihood of war in Ukraine into consideration in recent months, reducing uncertainty surrounding the current escalation, and likely reducing the potential future swings. In the last two columns of the table below, you can see how many days on average it has taken for the market to ‘bottom out’ and then recover following recent geopolitical events.

It is true that there are many unknowns at the moment, including: exactly how sanctions on Russia will impact US, European and global business and what the potential future impact of rising gas and oil prices will be. But keep in mind that all of the below geopolitical events have also been accompanied by their own uncertainties. We can see from total drawdowns in the table below, that the median market drop for these 16 geopolitical events was only 4.6% and all were followed by market price increases.

Nervousness surrounding sizzling inflation and expected rising interest rates in the US, Australia, and globally.

Prior to the ramping up of the invasion of Ukraine, markets were already in volatility and rising interest inflation and interest rates were a major driver of this. The US Federal Reserve (the equivalent to the Reserve Bank of Australia) is preparing to raise interest rates in March 2022 as the US attempts to curb rising inflation (inflation is when the cost of things is increasing). This would mark the first increase in interest rates since the Coronavirus pandemic struck. Australia and other countries globally are now looking to follow suit. So far, this has had a more substantial impact on markets than the discussion of Russia’s war with Ukraine. There are a number of reasons why investors don’t like rising interest rates, and you can learn more here.

Continuing supply chain bottlenecks

If you’re not in manufacturing, construction, or a line of work that relies on these parts of the supply chain, then you may not be aware that the world is in the midst of a supply chain crisis. This has impacted everything from car parts to building materials, and even global food distribution. It has also seriously cut into the profits of a number of companies. The realisation that global supply chain problems are deep and structural, and require significant policy change to fix (and won’t be simply resolved as we learn to live with COVID-19), has certainly had its impact on overall share market sentiment.

The general vibe

Institutional investors take the public mood into account when they decide how much they’re willing to pay for stocks. If consumer spending goes down – or is likely to – it creates a feeling of pessimism that’s reflected in the stock market. The result can cause investors to hold off purchasing stocks and possibly begin to sell existing stocks.

Signs of over-optimism can also cause eventual nervousness. If things like houses, stocks, and shares (including crypto) are selling much higher than usual (as many believe they are now), it can cause concern that prices are too high to justify. Or as we like to think of it: if something looks too good to be true, it probably is.

Potential interest rate rises, as well as the ongoing COVID-19 pandemic and periodic announcements of new Coronavirus variants, are all impacting the mood and have tempered consumer sentiment in the first months of 2022.

Meanwhile the media has been talking about a ‘market correction’, what is that?

Once investors decide that the prices of companies are too high, they may choose to sell existing stocks or refuse to buy new stocks at current prices – this is then the cause of a ‘correction’.

Although there isn’t a universal definition for the term, a ‘market correction’ is one of the most common terms used when a major stock index falls by more than 10% (but less than 20%).

There have been 24 global corrections since 1974, and five of them have led to a recession (it’s good to keep in mind that 19 haven’t!).

Should you be concerned for your super?

Of course, we’re not going to tell you how you should feel.

The most important thing to keep in mind is that market fluctuations are normal. If you check Verve’s Product Disclosure Statement, you’ll see that we plan for these moments – we expect some level of annual loss to occur between four to less than six years in any 20-year period. In other words, as crazy and unusual as these periods can feel, they’re actually nothing out of the usual!

Often the greatest losses are incurred by investors who get concerned and pull their money out when the market is at its lowest, missing the cycle when it swings back up.

At Verve it’s business as usual and our Investment Managers are continuing to seek out positive investment opportunities for the long term. When it comes to investing your super, we’ve got our sights set on the next five years, ten years, and twenty years.

And finally, who is that guy?

If you’ve been reading a lot about the financial markets lately, you might also be wondering: who is this mysterious ‘Mr 588’??? Just about every financial publication likes to pop his photo in anything merely related to the stock market, so we figured we’d track him down.

Meet Peter Tuchman – known as the Einstein of Wall Street. He’s apparently the most photographed trader in the world. I mean, what could add more drama to a news article about market turbulence than an old white man who strangely ressembles your confused uncle, just moments after he’s learned the Christmas BBQ will be vegan this year… We’ll leave you to discover more about Peter on his Instagram.

Our team is here to support all Verve Super members. If you have any questions, or just want to check in, you can get in touch via hello@vervesuper.com.au.

—

This blog is published by Verve Superannuation Pty Ltd (ABN 65 628 675 169, AFS Representative No. 001268903), which is a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956, AFSL 238184), as the Sub-Promoter of Verve Super.

Verve Superannuation Pty Ltd and True Oak Investments Ltd are not licensed to provide personal financial advice. The information contained in this blog, including any financial guidance, is general in nature. You should consider seeking independent legal, financial, taxation or other advice to ensure that your financial decisions are suited to your unique circumstances.

You should also read the Product Disclosure Statement, Additional Information Booklet, Insurance Guide, Target Market Determination and Financial Services Guide before making a decision to acquire, hold or continue to hold an interest in Verve Super. When considering financial returns, past performance is not indicative of future performance.

—

This article was updated on 8 March 2022

*A major stock market index is essentially a tracking of the top listed companies in a market, for instance: the ASX 200 is a list of the largest 200 companies listed on the Australian Securities Exchange)

—

You should read the Product Disclosure Statement, Additional Information Booklet, Insurance Guide, Target Market Determination and Financial Services Guide before making a decision to acquire, hold or continue to hold an interest in Verve Super. When considering financial returns, past performance is not indicative of future performance.