The past week and a half has been a rollercoaster ride for investors in traditional assets, who saw markets surge by multiple percentage points, only for them to turn around and give nearly all of the gains back.
The volatility seen was driven by a range of factors, including events in Australia, with investors rapidly changing their outlook for interest rates.
The price action also highlighted the difficulty investors continue to face, in terms of trying to generate returns in traditional assets, which in nearly all cases remain well below their all-time highs as a result of the correction we’ve seen across 2022 as a whole.
Pink diamonds meanwhile continue to stay strong, with new records set at an auction held in Hong Kong.
Rollercoaster ride for markets
The last week was shaping up as one of the best on record for investors in traditional assets. Share prices surged in the first few trading days, with local and international markets recording their best two-day rally since they began to recover from the pummelling received when COVID-19 lockdowns first ravaged markets back in 2020.
The primary catalyst of the rally was a belief by market participants that central banks, who have been hiking interest rates very aggressively in 2022 so as to limit the damage that surging inflation is causing to the economy, will soon ease back on the speed and severity of rate hikes, with an expectation that interest rates may soon peak.
While this narrative had global ramifications, as equity markets worldwide surged, it was arguably ‘made in Australia’. This is because it was the Reserve Bank of Australia’s (RBA) decision to increase interest rates by just 0.25% last week, rather than the 0.50% most market participants had forecast, that was used as “Exhibit A” by those arguing rate hikes will definitely slow soon, if not outright cease.
Academics and economists also publicly argued that central banks should soon ease back on the pace of rate hikes, including Nobel Prize winner Paul Krugman (see image below of an article published on October 5 about Krugman’s views).
He warned that:
- Central banks may go ‘overboard’ in their attempt to cool inflation.
- The labour market is cooling.
- Interest rates will likely return to zero or near zero in due course.
The problem with all of this was that reality soon intervened, with oil prices continuing their recent surge, inflation forecasts increasing rather than decreasing, and forecasts for economic growth continuing to improve.
Labour market data also showed that there are still plenty of people being hired, with the unemployment rate in the United States falling. So much for a cooling labour market as predicted by the experts.
While some of this data (especially the employment results) is good news for the economy, it was bad news for financial markets, as market participants quickly re-appraised their view on what central banks are going to do.
They are now again expecting a sharper pace of interest rate hikes to try and cool the economy and quell what is still a very obvious inflation problem.
As a result, markets ended the week in the free fall, with the S&P 500, NASDAQ, and Dow Jones indices in the United States falling -2.80%, -3.80%, and -2.1% on Friday.
Australian markets also fell on Monday the 10th, down by almost 1.50%, bringing to an end the short-lived party that saw markets rallying hard only a few days ago.
The chart below encapsulates what transpired, which shows the S&P 500 surge in the first part of last week, only to give nearly all of the gains back by Friday.
It also shows how difficult it is to make money in markets like this.
For most of the past 15 years, there was an upward trend that was very clear – just staying in the market would deliver rewards.
This trend is completely broken now, with many markets off by 20% or more in nominal terms in 2022, and closer to 30% as a minimum once inflation is factored in.
Given the challenges posed by surging consumer prices and higher interest rates, it’s unlikely that the ‘good times’ will return soon for traditional markets.
This can’t help but encourage investors to look elsewhere for returns, diversification, and wealth protection in their portfolios.
Rare pink diamonds keep surging
Pink diamond auctions often make the news, with the eye watering sums that high net worth buyers are willing to pay always worthy of a headline.
A recent auction held by Sotheby’s Hong Kong was no exception, with an 11.5 carat diamond (the Williamson Pink Star diamond) selling for $US 57.7 million ($AU 78.46 million). The second most valuable gem ever sold at auction, its price dramatically exceeded expectations and produced a new world record for price per carat, commanding more than $US 5.1 million ($AU 7 million) per carat.
The screenshot below captures the way various media organisations covered the event, with coverage in Forbes, the ABC, Al Jazeera and the Guardian to name just a few.
While this was an auction for ultra-high net worth people only, the surging price and strong demand match what we are seeing in our business at Australian Diamond Portfolio every day.
Indeed, over the next few weeks, the team and I at Australian Diamond Portfolio will be busy putting the finishing touches to the next quarterly update of our Australian Diamond Portfolio Pink Diamond Index (ADPPDI), a proprietary index built using thousands of data points provided by our global trade partners.
Over the last two years, the ADPPDI has shown price growth in excess of 50%, with fairly even growth across all categories, with the price surge driven by both the crimping of supply due to the closure of the Argyle mine in late 2020, and the surging demand we’ve seen in the subsequent period.
We look forward to releasing the updated results, which will help highlight the ongoing strength and stability in the pink diamond market.
As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.