So What’s Going On?
24 May 2021
To all Financial Friends
Certainly some extraordinary things for sure! Joe Biden's American Rescue package for one! Joe has been sending out cheques worth $1.400 to 164 million individual US citizens to support his economy. Spend, spend, spend! No wonder then that inflation in the US is reportedly at 4%. Stimulus packages like this show that the global economy is still retained in intensive care whilst expecting to recover. Equity markets fell on fears of inflation causing the need for interest rates to rise to dampen the effect. So, inflation has hit the headlines. Two steps ahead, as students of our Course, you will have been expecting exactly this. Your fixed interest holdings should already be found in inflation index linked bonds as a result of our earlier mails and contact.
Opportunities
Whilst stimulus activities continue to support economies and the virus outlook is positive, we can anticipate equities to rise. The FTSE 100 has a further 12% to rise to exceed it's previous all-time high and then perhaps correcting. The textbook tells us that during periods of inflation both equities and gold should rise. It is logical to hope for inflation index linked bonds to hold steady with some growth as and if inflation takes hold.
The Turning Point
The turning point must come, so we have our binoculars focused on indications of coming events. Stimulus has to stop and normal markets resume. So, to be two steps ahead, portfolios will at some stage, have to focus more strongly on fixed interest holdings. However, with the virus more under control, many expect good short to medium returns on equities. If inflation begins to get out of control the system will have to try to apply the brakes by raising interest rates. The principle is that higher interest rates reduces consumers spending and so prices fall. Well, that's the theory!
My expectation is that the inflation beast will need controlling and so interest rates will rise. This will force the global economy out of intensive care and back towards unsupported normal markets. The economic patient will have to stand up on it's own two feet unsupported. Will the patient stand or fall? Either way their will be investment opportunities to be taken.
PLEASE NOTE: A financial or economic commentary like these, are written to explain, interpret or give an opinion on economic events and markets to help readers understand what’s happening and why it matters. Designed to help you make informed decisions of your own by making you aware of opportunities, risks and potential rewards in the market.
