It's not hyperbole to describe 2022 as a disaster for stock investors.
Inflation anxiety, rising interest rates, post-COVID supply constraints, and a war in Europe have all conspired to hammer ASX shares.
The S&P/ASX 200 Index (ASX: XJO) is now down more than 14% year to date. That drop would be even worse if it weren't for mining stocks keeping the average up.
Unfortunately, AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver foresees "high risk" of further falls in the immediate future.
"Investors could be forgiven for looking back on the pandemic years of 2020 and 2021 with fond memories," Oliver wrote on the AMP blog.
"The risks are skewed to the downside in the short term. While investor confidence is very negative, we have yet to see the sort of spike in put/call option ratios or VIX that normally signals major market bottoms."
In the immediate period, a likely escalation in Russia's invasion of Ukraine, a winter in energy-depleted Europe, and even more interest rate rises could plunge the world into recession.
If the ASX 200 or US markets break below their June lows, according to Oliver, investors could be in for another terrifying 10% dip.
So there's potentially more pain to come. But what after that?
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'Light at the end of the tunnel' for ASX shares
Oliver sees "light at the end of the tunnel" for those on a longer-term view.
"While short term risks around shares remain high, we remain optimistic on shares on a 12-month horizon."
There are three reasons for his bright outlook.
"Producer price inflation looks to have peaked in the US, UK, China and Japan," he said.
"This is consistent with our pipeline inflation indicator, which is continuing to trend down given falling price and cost components in business surveys, falling freight rates and lower commodity prices outside of gas and coal."
Secondly, a slowdown in inflation will allow central banks to become more dovish.
"Lower inflation ahead… should enable central banks to slow the pace of hiking by year end, in time to avoid a severe recession," he said.
"If this applies in the US, then Australia should follow as it's lagging the US by about six months with respect to inflation."
Thirdly, there will be some seasonal drivers in play both for ASX shares and American stocks.
Shares have traditionally rallied in the last quarter of the year, with December typified by the Santa Rally.
Oliver pointed out that US congressional elections are also coming up in early November.
"Post US midterm election returns tend to be strong, just as midterm election year drawbacks tend to be more severe — with an average top to bottom fall of 17% in US shares in midterm election years followed by an average 33% gain one year from the low."
Yes, this year has been awful. But don't lose focus
Oliver acknowledged that 2022 has been "stressful" for investors.
"No one likes to see their investments fall in value," he said.
"At times like these, it's important to focus on basic investment principles."
These principles include not selling shares in a bear market and sticking to a long-term strategy.
"Share market pullbacks are healthy and normal — their volatility is the price we pay for the higher returns they provide over the long term."
According to Oliver, shares are at the bottom when the market hits "maximum bearishness".
"Australian shares still offer an attractive income (or cash) flow relative to bank deposits," he said.
"It's best to turn down the noise around all the negative news flow."
