Markets have moved higher for yet another quarter. Encouragingly, large-scale volatility has been mostly absent as record GDP growth in the U.S. has now exceeded pre-pandemic levels.
While bond portfolios may not have been stand-out performers, they continue to provide portfolio stability. This has been encouraging given that we are overdue for both a correction and interest rate hikes.
With GDP in the U.S. at 6.5% and inflation running in excess of 5%, we are expecting rate hikes – and not just one or two.
Given the economic growth rate, policymakers will be soon be forced to try to hold down inflation by nudging the rates. As such, we would expect the Fed to start to shift monetary policy and start increasing rates within months, rather than years.
And as the old saying goes…
“Interest rates trends are like trains. They take a long time to get going and a long time to get stopped.”
Given that a record amount of bonds come due in 2022 and need to be rolled over in both the U.S. and Chinese markets, one might expect a bidding war to emerge. Should this occur, there is a valid concern that it will likely continue to push rates higher once the upward trend starts.
A fear among portfolio managers is that the Federal Reserve does not act soon enough in raising rates. This risks runaway inflation and thereafter significant rate hikes, which could potentially put the economy in jeopardy.
Market watchers are also keenly watching Covid infection rates. In particular, things like reinfection rates and break-through infection rates may determine whether large-scale outbreaks could affect growth going forward.
With the strong economic growth back in the economy and things running full steam ahead, corporate profitability has seen a substantial uptick. This has helped bring bringing valuation numbers down.
Earnings from technology companies have once again, been a standout. In some cases dramatically beating expectations.
And now, that Google has announced that they are putting off retiring third-party cookies (which are used for web tracking) for at least two to three years, there is considerably less risk to the sector over that period.
We continue to expect another typical correction which at this stage is long overdue.
Your portfolio managers are waiting too and will use the opportunity to continue to buy the world’s best companies at a discount for you.
If you like to talk about your portfolio, need some help, or just want to have a chat, we’re always here.