Inflation is the buzzword of our day, its rise in 2021 and continued rise in 2022 to the highest readings since the 1980s has triggered central banks the world over to respond with tightened monetary policy and higher interest rates.
Tesla stock is down 47% year-to-date, Bitcoin is down 52% over the same period, and we have seen parts of the crypto-world crash hard. Terra, a crypto currency, collapsed 100% (it literally fell to zero) two weeks ago, followed by a prominent crypto exchange shutting down and refusing to refund investors.
This is no coincidence. As central banks are forced to remove liquidity from the global financial system to fight inflation, the most aggressively speculative assets have seen big outflows of capital and serious price declines.
The rules that worked for investors over the past five years are being thrown out of the window and a new market dynamic is emerging, triggered by inflation and higher interest rates, likely to end with a full wash-out of speculative assets whose prices never had any connection to the real world.
This is not new. Markets are dynamic systems, this means the system is always changing, often times slowly, other times quickly. We are certainly now in a period of fast change in market dynamics. What this means for investors is that strategies that delivered strong price returns in the recent past are now no longer fit for purpose; they do not work anymore and, in fact, are delivering strongly negative returns (see ARK Innovation Fund’s performance as a case in point).
Investors should avoid panic, but they must also avoid burying their heads in the sand. The past decade has given rise to a false sense of security for many, with an overreliance on passive investment strategies, as well as a continuation with strategies that worked in the recent past. That period is definitely over, and the demise of the funds and asset classes which propelled the bull market in 2020 and 2021 are strong evidence of this.
The silver lining here is that, if investors can get their strategies right at this critical moment in markets, investment returns could be very strong over the next decade. Getting the strategy right in 2001 and in 2009, seminal years of major market change, supported a decade of excellent returns for those investors. We see 2022 as just such a seminal year for investors.
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