Keeping expectations on an even keel has been a challenge when it comes to the financial markets. In 2022, we have experienced a rapid reversal in both direction and sentiment. With persistently high inflation, and with headwinds from the Ukraine war and the spring Covid shutdowns
in China, the central banks have taken a more aggressive stance to try and temper inflation. This has prompted worries that, with slowing growth, economies may be pushed into a recession. The changing expectations and economic uncertainty have created significant volatility in the markets.
Indeed, humans often react unfavourably to uncertainty. Studies have shown that our emotions are a key driver of stock market volatility over shorter periods. One study suggested that roughly 75 percent of short- term market variation can be explained
by risk aversion.1 This is because we often underestimate our ability to adapt.
