Market update
As we move into 2024, it’s a good time to look back at 2023 and the major themes which influenced markets and affected investment returns for super.
There were three major themes which dominated markets in 2023.
1. Inflation
Inflation is an increase in the price of goods and services. When inflation is high, prices are accelerating and you pay more for many of the things you buy. A little bit of inflation is good for an economy, because it shows it’s growing, but when it’s too high it becomes a problem. It means you may no longer be able to afford the things you need, like medicine and electricity.
Starting in 2022 and continuing in 2023, rising inflation is exactly what we saw in most countries around the world. It rose quickly as Covid lockdowns ended, and has been much higher than central banks, including the Reserve Bank of Australia (RBA) want it to be.
Central banks have therefore been increasing interest rates to try to bring it down.
2. Rising interest rates
Interest rates are central banks’ main tool to control inflation. When they raise rates, they hope to slow the economy down, which brings inflation down as well. Since May 2022, the RBA has raised rates 13 times, from 0.1% to 4.35% at the end of December 2023.
There’s always a lag between rates going up and the economy slowing down, so it’s difficult for central banks or markets to predict with certainty how quickly, or by how much inflation will fall when rates rise.
This is an important point to understand because during 2023, it was investor uncertainty about how high rates would go, and how quickly central banks would raise them, which caused periods of market volatility, or ups and downs.
3. Geopolitical tensions
Geopolitical tensions and conflicts cause volatility in markets because they create investor uncertainty. This year we saw on-going global conflicts around the world, and these made markets volatile at times.