There Is Still No Alternative for Investors

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Whether a post-pandemic world brings a consumer boom or a fight against “inflation”, it may not mark the end of easy money.

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Money has flowed out of technology stocks and other “growth” sectors, and into “cyclical” sectors that benefit from higher interest rates, such as banks, or benefit from supply shortages that sicken the global economy, such as Car manufacturers and energy producers.

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The realization that the “temporary” inflation resulting from these constraints may last for some time is persuading some Federal Reserve officials to reduce their $120 billion in monthly bond purchases as of November, which has led to a “taper tantrum.” ” gave rise to apprehensions. “Similar to 2013.

On top of that, there are concerns about Evergrande not removing the US debt limit and a potential spillover from the restructuring of Chinese assets. The US dollar has gained more than 1% this month against the euro, while yields on 10-year government bonds have risen from 1.3% to 1.5% in just a week.

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This looks like a challenge to a world of modest economic growth and very low interest rates, in which investing in growth stocks and long maturity bonds is advantageous because central banks always protect the markets from downturns.

Today’s beef is instead between optimists and pessimists. The first lot believes that proactive fiscal policies will lead to a sustained consumer boom in 2022, boost cyclical stocks and allow markets to deal with a slow normalization of monetary policy. The second group sees the current crisis as the beginning of the disastrous “stagflation” of the 1970s in which economic growth is stifled by Fed tapering but high inflation remains.

Investors tend to overestimate the mechanical effect of central bank buying and selling, which has historically left no visible mark on the bond markets in a few months. More important is whether the taper signals an era of higher interest rates; Some rate setters are pointing in this direction. However, every precedent shows that the Fed’s meticulous management of the markets is here to stay, and officials will certainly be right whenever bond yields are high enough to seriously threaten equity markets.

Yes, the reduction may keep inflation high for some time, but it won’t tie the hands of executives alone: ​​unless wage increases begin to powerfully feed into inflation, they will find sound arguments for keeping rates low. Concerns about asset-led recessions in Evergrande and the Chinese economy could be one of them, as in 2015.

Meanwhile, the bigger risk comes from the labor market, which still hasn’t fully recovered. The US employment-to-population ratio for 25-to-54-year-olds is down more than 2 percentage points from its pre-Covid peak, at a time when governments are set to ease back on fiscal activism. The ongoing economic recovery is not likely to be as slow as in the post-2008 period, but it may still fall short of expectations.

Perhaps investors shouldn’t throw out the old playbook right now.

John Sindreu [email protected] . Feather

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