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Navigating tough markets | Understanding May’s financial downturn

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By Capital Partners Markets and Investments

The month of May has seen a continuation of the tough market environment seen in recent months with most asset classes showing negative returns for the period.The ASX fell in May because of losses in the technology and real estate sectors. Not even the Federal election could buoy markets – we typically see markets rise in the period immediately after an election.

In the 11 elections held since 1990, the All-Ordinaries Index climbed by an average of 1.2 per cent in the 15 trading days after election day, according to CommSec research

The fall in May can largely be attributed to falling consumer sentiment and rising interest rates which typically have an impact on growth securities and real estate. We did see a marginal rise in materials for the month on the back of easing Covid restrictions in China but this was overshadowed by falls in the other sectors.

The recent RBA meeting saw the cash rate rise by 0.50 percent. We have seen two rate rises in consecutive months here in Australia, for the first time since February 2000, with the cash rate now sitting at 0.85%. In the press conference following the meeting, the RBA Governor Phillip Lowe stated ‘Australian households are likely to experience even worse levels of inflation than they currently are’. The RBA has also stated that they expect the inflation rate to normalise in the 2-3% range by 2023.

U.S Equities ended flat for the month despite the increasingly hawkish (tighter monetary policies) position of the Federal Reserve. Recent data shows inflation has risen to 8.5% in the U.S, up from 8.3% in April, prompting the likelihood of more aggressive action. The S&P 500 ended the month up by 0.01%, leading to the year-to-date return of -13.30%.  Technology stocks were the largest contributors to the fall.

We do expect volatility to be higher over the coming period as the Russian-Ukrainian conflict continues to unfold, and its impact on oil and commodity prices lingers. Inflationary pressures will continue to create uncertainty.

In these times of uncertainty our recommended approach is to remain invested, and history shows that share prices often deliver positive returns over the 1, 3 and 5 year period, following market drops.

The information provided on this site is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if these strategies and products are right for you.

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