Opinion – From Grain to Grain: What we learned from the performance of the markets this week

After suffering a drop of almost 12% in 2022 until March 11, the international stock market showed strong appreciation this past week. The direction and intensity of the movement surprised everyone and reflects an important lesson.

The first quarter of 2022 is not over yet, but it was one of the most intense in the last decade. International markets had the second worst performance in the last 12 years. It just wasn’t worse than the first quarter of 2020, which was the year marked by the beginning of the pandemic.

The table below depicts the quarterly return of the MSCI All Country World Index (MXWD) over the past 12 years. This index measures the average variation of 23 developed countries and 24 emerging countries.

The first quarter of 2022, even with the high of this last week, still shows a drop of more than 7%.

Reasons for this devaluation are not lacking. There is a war that promotes strong tension between global powers and a high impact on commodity prices. Inflation around the world, which was already under pressure, rose even further with the rise in commodities. To contain this inflation, Central Banks have already started a process of monetary contraction with increases in interest rates.

The more pressured inflation, together with the interest rate increases, already reduce the expectation of global economic growth.

Even with all this news, MXWD is up 5.72% this week. The rise surprised everyone as it was the fourth biggest weekly rise in the last decade. The figure below shows the evolution of the MXWD index (yellow line) and the weekly variation of this index (white bars) in the last ten years.

This strong variation reflects a lesson that investors should consider when building their portfolios.

Asset prices reflect future economic expectations.

Thus, it is not necessarily with the release of negative news that the market falls. Prices usually fall before the release of the news, if there is already an expectation of negative information.

Therefore, even with the disclosure of bad facts, if they are better than expected, the result could be the appreciation of assets, as happened this week.

Often, short-term noise, which promotes strong volatility in asset prices, compromises our ability to remain faithful to the scenario and potential of assets in the long term.

Therefore, it is important that your investment portfolio considers an allocation in the portion of risk appropriate to your investor profile and with a long-term horizon. Avoid chasing the market, especially in times of high volatility like the current one, or you will end up moving your portfolio unfavorably.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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