What’s Behind Market Volatility?

What’s Behind Market Volatility?

On every investment journey there are times when markets will fluctuate and right now we are witnessing a high level of market volatility.

Why is this? You’ll have noticed on the news the more obvious factors:

  • Inflation in the UK has risen, with many countries also seeing rises
  • The cost of energy is also rising, squeezing incomes and reducing disposable spending
  • Tensions at the Russia/Ukraine border
  • Expectations of higher interest rates in the US and UK

Each of these factors, creates uncertainty in the markets – something investors tend to dislike. Investors then taking (or avoiding) actions can spur on increased volatility.

What is True Potentials take on how to react to the uncertainty, and the natural feeling of concern when you see volatility in markets?

Chris Leyland, Director of Investment Strategy at True Potential, says:

“Our view is that economic growth is strong and stronger than we have seen pre-pandemic. Consumers are generally healthy right now and there is significant demand leading to higher inflation, alongside some more idiosyncratic challenges such as supply chain disruption.

 It is important to understand that interest rates at current levels are not normal. Interest rates were cut to help global economies during Covid. We are now significantly through the recovery phase and it is time for this to be corrected.

 Our view is that we will see volatility in asset prices as different datapoints and news comes through but investors will adjust. Diversification as always is key, by asset class, geography and manager to help navigate through different events.”

Keep in mind that although it can feel uncomfortable to see prices falling, volatility is a normal feature of any long-term investment. Indeed, market volatility can also mean investments going up as well as down. By setting a goal you should be able to focus on a long-term vision, and not be blown off course by occasional dips.

Remember, that all news cycles eventually pass and uncertainty eventually dissipates. Remember when Brexit and Trump were on the news every day, and some of the concern over what those events would do to markets? Or think back to the volatile markets of March 2020 – by the end of the year investors were experiencing record highs.

In summary, the current market volatility is related to a variety of factors, including the news cycle, central bank decisions, inflation and interest rates.

Volatility is a normal part of investing, though it can be worrying. Keep yourself informed on the reasons behind movements and speak to your financial adviser if you need personal advice.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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