Market Watch: Year of the Bear - what we predicted and what we got wrong

It has been a rough year for share market investors in 2022 with markets heading into bear territory.

Despite a solid rebound since early October, the S&P500 is still off 17 per cent for the year to date.

The local NZX50 looks a bit better, currently down about 10 per cent for the year to date.

For Pie Funds founder and chief investment officer Mike Taylor that’s made some of his forecasts bittersweet.

This time last year Taylor was picking a sizeable fall. In particular, he saw cryptocurrencies and tech stocks like Tesla bearing the brunt of the sell-off.

That has turned out to be a good pick with Bitcoin down around 65 per cent and Tesla down around 55 per cent.

“[Cryptocurrencies] were an asset that was definitely over-inflated fueled by the easy money that came after Covid, and of course, that’s come crashing down this year,” he said.

“Tesla had reached the point last year, where, you know, it was bigger than all other car companies combined. I had a huge valuation.”

“It’s not always good to be right on those things, because people have lost money. but I think you know you do have to call out when things get overvalued, and when things are in a bubble.”

Despite picking that rising interest rates would be a key driver of markets in 2022, the speed and magnitude of rate hikes had been a surprise, Taylor said.

That had put more downward pressure on equity markets and delivered the worst year on record for bond investors.

That came back to inflation, which had proved “stickier” than expected, Taylor said.

Of course, that was clearly not helped by the invasion of Ukraine by Russia and the subsequent shock to oil, food and other commodity prices.

That was something that wasn’t on the cards a year ago, Taylor said.

That said, domestic inflation pressure had also proved stronger than hoped, fueled largely by labour shortages.

Mike Taylor, founder and chief executive of Pie Funds. Photo / NZME

“The reopening of the borders has not created an influx of people on working holiday visas that we might have hoped, Taylor said. “And those people that left in March 2020 haven’t really returned.”

“With unemployment at around 3 per cent, we’ve got a very tight labour market and whenever you walk around your local streets you see staff wanted, particularly in hospitality and that’s not going to be resolved anytime soon.”

One area where Taylor did have concerns last year was around central bank policy and the risks to the timing and weighting of rate hikes.

There was a risk that central banks might have started tightening too late but then also that they might overdo it on the other side causing a deeper recession that was necessary.

“A lot of money was pumped into the system and New Zealand was no exception,” he said. “In the US it was literally trillions that was just handed out in stimulus checks. You had interest rates at an all-time low, you quantitative easing. So everything was thrown at it. And, at the time that seemed like the correct decision.

“With the benefit of hindsight, we allowed that stimulus to run for too long when it wasn’t really needed. It was pretty obvious to see that, throughout 2021 and to the end of last year, things were booming.”

Now there were signs the central banks might be going too fast in the other direction.

“There’s a lag effect of about six months for the impact to be seen on monetary policy. So, we are only really seeing now things that happened in March and April.”

But rate rises were going to keep coming through until about March next year, he said. “It will be the back half of next year before that’s felt and so it does appear that 2023 will be a challenging year.”

In the next few weeks, Market Watch will take a look at what to expect for shares, and the wider economy, in 2023.

- The Market Watch video show is produced in partnership with Pie Funds