The first half of 2022 has been a particularly difficult one for both the economy and the financial markets. The massive injection of liquidity by central banks in response to the pandemic has contributed to rising inflation. Initially, the general view was that inflation would be transitory, but this has not been the case. The Russian invasion of Ukraine has exacerbated the situation by causing shortages of resource and food exports. The central banks were initially reluctant to act but have now entered the fray to fight inflation. A steady rise in interest rates will likely continue through 2022 and into 2023 as the money supply becomes further restricted.
High inflation and rising rates are not good for either the economy or the financial markets. The central banks must cool off growth without tipping the economy into recession. While some elements of the current scenario echo the 1970s, there are notable differences. As we continue to emerge from the pandemic, economic growth remains positive. Strong demand for employment has resulted in pervasive labour shortages. Meanwhile, the consumer appetite for goods during the pandemic has now shifted to a surge in demand for services.
We expect above-average volatility to continue in the financial markets over the second half of the year. Interest rates will continue to rise, and speculative short-term investors will continue to exit. The level of margin debt in investment accounts in the United States has already been reduced 20% to $750 billion and will fall further. While market performance has largely been positive over the past decade, the occasional negative year has always been part of the investing experience and is a very real possibility for 2022. Looking forward into 2023, we are cautiously optimistic. Rising interest rates will cool economic growth, speculative funds will play a reduced role in the markets and companies with solid fundamentals will return to a leading position in the equity markets.
Difficult times such as these reinforce the importance of our focus on the business fundamentals of the defensive companies that we invest in. We seek businesses that feature reliable revenue growth, profitable operations, strong balance sheets, growing cash flow and responsible allocation of free cash flow. These types of companies have excellent defensive characteristics, positioning them well to navigate through economic cycles and to generate superior returns for patient shareholders.
Strategically, we will continue to carry an elevated cash level in your portfolio. We will look to re-deploy these funds into the market as opportunities present themselves.