This year started with some significant volatility in January. But will 2022 be the year of a cash or crash for ASX shares?
By 27 January 2022, the S&P/ASX 200 Index (ASX: XJO) had fallen by around 10%. There has been a bit of a recovery since then. But, the ASX 200 is still down by approximately 5% this year.
Some leading ASX shares are still down significantly, particularly in the tech sector. For example, since the start of the year the Xero Limited (ASX: XRO) share price is down 33%, the Altium Limited (ASX: ALU) share price is down 25% and the WiseTech Global Ltd (ASX: WTC) share price is down 25%.
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Crash or 'cash' this year?
There has already been an ASX share market correction this year, with that drop of around 10%.
Rudi Filapek-Vandyck wrote on Livewire about what's happening to the ASX share market and how inflation is factoring into a lot of the volatility:
The change in inflation forecasts over the past five weeks has been nothing short of dramatic… markets are now considering the idea that the Federal Reserve might have waited too long, and will be forced to step on the monetary brakes through accelerated actions. It is this change in projections that is currently feeding into volatility and uncertainty in markets.
In Australia, the general shift is to pull forward the first RBA rate hike to November or August this year.
In the US, forecasts have literally gone into overdrive with all kinds of scenarios being considered, including starting the cycle with 50bp, hiking at every meeting this year, having rate hikes in between meetings, and continuing at full force throughout 2023.
Indeed, the economists at Goldman Sachs now think that there could be seven interest rate hikes by the US Federal Reserve in 2022.
Why do interest rates matter so much?
Higher interest rates can have a big impact on asset prices, particularly the assets that are being priced for the long-term because investors then have to use a larger 'discount rate' to get back to today's value for that asset. Meaning, higher interest rates lead to lower asset prices for the ASX share market, on paper.
Billionaire Ray Dalio from Founder Bridgewater Associates once said:
It all comes down to interest rates. As an investor, all you're doing is putting up a lump sum payment for a future cash flow.
The Reserve Bank of Australia has itself acknowledged that:
Low global policy rates have boosted a broad range of asset prices and encouraged financial risk-taking…the historically low level of interest rates and the protracted length of time they have been at those levels have led to particularly strong responses of asset prices.
Metrics of many assets' valuation, which are contingent on the low risk-free interest rates, are elevated relative to history. In addition, investor compensation for bearing many types of risk has fallen to record levels, and some investors have significantly increased their risk prices.
A sharp increase in long-term risk-free interest rates toward historically normal levels could result in widespread asset price falls if it is not accompanied by stronger growth.
Is this decline an opportunity or is a crash certain?
There are lots of different opinions on what's happening. Serial bear Jeremy Grantham thinks that the share market is a "super bubble" and that 2022 could be the year it unravels. But he's been saying that for a while.
Auscap Asset Management's principal Tim Carleton thinks that the market has seen some indiscriminate selling but inflation won't affect all ASX shares equally, according to reporting by the Australian Financial Review. Some could actually benefit in these conditions. Mr Carleton said:
The one thing that I think is getting confused is this correction, particularly in highly priced stocks in the market, has nothing to do with the outlook for the domestic economy. For us, it's very positive.
Warren Buffett once famously said: "Be fearful when others are greedy and greedy when others are fearful."
Two of Motley Fool Australia's leading investors have also shared some thoughts about their views of the recent volatility.
