For the bulk of the year, we have witnessed market volatility across the board. This is noteworthy as it followed an extended period when markets seemed destined to only go up. It feels like only yesterday when a meme-based parody cryptocurrency, Dogecoin, was set to ‘soar to the moon’.

In hindsight, the likes of Dogecoin and John Terry’s NFT collection now appear to personify the type of investor hubris that has characterised the advent of so many previous bear markets. Yet, John Terry’s NFT project had dropped by 99% since inception, as of June this year, and Dogecoin is down close to 70% over the past 12 months.

While hindsight is always 20/20, it is worth noting that financial markets performing worse this year than they did in 2020 and 2021, when the global economy was mothballed, is somewhat counterintuitive.  On a purely anecdotal basis, the volume of people crowding back into cities, airports, and offices this year, as compared to the zombie apocalypse wasteland of the previous two, suggests that this would be a more positive year for markets.

This is an assumption also supported by a buoyant job market. For example, the UK government reported an unemployment rate of 3.8% in August, as low a figure as has been reported in decades.

However, counterbalancing these positives are inflationary concerns, interest rates hikes and the unexpected conflict in Ukraine. A triple threat that has been the catalyst for uncertainty and fear, twin emotions that are kryptonite to investor confidence.

On reflection, it is strange that rising inflation has come as such a surprise to central banks. The global reaction to COVID was to print more money and restrict trade, a policy that would create the perfect environment for inflation – too much money chasing too few goods. Unfortunately, policymakers were not willing to take steps to manage this eventuality.

Rather than gradually raising rates last year, when market confidence was high, they have implemented a flurry of rate rises this year. A strategy akin to not taking the stabilisers off a child’s bicycle when their confidence is high, and doing so when their confidence is low, while also pushing them down an enormous slope.

Again, it is easy to be smart after the event, but I cannot help but feel policymakers have been guilty of a certain amount of naivety and hubris in recent years. This situation is rooted in their reaction to the Global Financial Crisis (GFC).

Back in 2008, when faced with the GFC, policymakers chose to reduce interest rates to historic lows and pursue a money printing exercise known as quantitative easing. At the time, several economists urged caution and pointed toward examples from the past where such policies created a hyperinflationary environment, most famously the Weimar Republic.

For the next 14 years, these concerns appeared misplaced as inflation remained low, and the same playbook, rate reductions and quantitative easing, were used to negate every financial challenge that arose.

So, what has been the difference this time?

In my view, the policymakers of 2008 were protected by the brilliance of private enterprise and technology. While they undoubtedly produced more money and made lending cheaper, the global economy was able to meet this increased money supply with enough goods.

However, when faced with COVID, the political reaction was to shut down global trade, fundamentally changing the economic landscape for policymakers.

Unfortunately, despite this change, their reaction to these challenges remained the same. Interest rates were again reduced, and money printed. But with global trade at a standstill, not enough goods were produced to meet the oversupply of money, resulting in an inflationary period and the ensuing market volatility.

While the eye of every financial storm and bear market can make one assume the sky is finally going to fall on our heads, I would urge you to reflect on how many times people and private enterprise have adapted and found a way to continue to grow and thrive.

If you need a reminder of that fact, switch off the talking heads on TV discussing the next calamity, look outside and see how many people are getting on with their lives and working hard to improve their lot.

Bear markets tend to reflect the decisions of the past, whereas one’s actions during a bear market will likely guide your future. Staying calm, recognising opportunity, and working hard seems a great deal more likely to yield positive long-term outcomes, than pontificating about the end of the world and investing emotionally.

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