What a year 2022 was, and what a first quarter of 2023 it has been. The market is finally cracking from the rapid rise in interest rates from central banks around the world. However, only certain segments are cracking. It doesn't appear to be a wild bushfire - yet. And I'm not saying there will be one either.
The events of the past few weeks are a reminder of how fragile markets and banking systems can be. The events also served as a reminder of the lengths central banks and financial regulatory authorities will go to, to ensure the system remains robust. Over the last two decades, central banks have become more engrained and immersed in financial markets. I think it becomes really hard to remove yourself from them once you become this close.
Heading into 2023, consensus thinking seemed to be that we were one piece of good news away from a Fed pivot. Yet, equities rallied in January with no major news as a catalyst. February saw financial markets give up some gains before the hairline cracks become something much bigger in SVB and Credit Suisse. For now, the matter seems contained. And the Fed has its eyes firmly on reducing inflation. This, and the blunt tool that is used to fight the inflation beast, is a crucial and central component of all of the financial markets, including debt.
We have updated our Financial Market's Handbook for 1Q 2023 and examine the impact the last quarter has had on key financial indicators that relate to financial markets. You can download the report here. You are welcome to share it across your network.
I think investors generally under and overestimate the potential outcomes in financial markets. We saw this during the super-low interest rate cycle, and we're seeing the opposite unfold as rates rise sharply. The market generally falls somewhere in between. I also think investors too often make decisions with a yes/no response or invest/won't invest outcome. These decisions are binary. The world doesn't work this way - at the very least the financial world doesn't work this way. There are many possibilities with many probabilities. Investors should be looking at and making decisions probabilistically, and asking questions such as: What if I'm wrong? What else is possible? What haven't I thought of? What could the market know that I don't? Why am I so sure of this? Having some degree of self-awareness will help you make better decisions.
Jonathan Sim and I discuss more of what is going on in financial markets in last week's The Wide Lens Podcast.
We'll be taking a break over the next few weeks during Easter and the school holidays and will be back soon.