Resilience has been the best term we can apply to markets as of late.
Despite concerns over rising inflation and interest rates, supply chain issues, a Chinese property market collapse and a new energy crisis, markets have been able to pull back from a September slow down and are now once again at or very near all-time highs. It’s been said that markets ‘climb a wall of worry.” That certainly seems to be the case here.
Your portfolio managers have been expecting a solid correction for some time now. Yet with interest rates as low as they have been, the lack of alternative opportunities seems to be the determining factor in where investors are placing their assets.
Strong corporate earnings
Strong corporate earnings have once again saved the day. One would think that with the challenges the world is facing, that earnings would be taking a hit, but that has not been the case as a whole.
But nothing lasts forever. So when the next correction hits, we expect it to be severe. One has to only look at the potential for things to go wrong.
Firstly, there is interest rate risk. While no one expects rates to jump like they did in the 80s, common sense dictates that central governments will at some point start raising rates to try and cool the massive inflation, we predicted over a year ago now.
While it’s probably too early to call it runaway inflation yet, it’s clear that prices are up dramatically across the board. Perhaps as concerning, there doesn’t seem to be any change on the horizon that we’d expect to reverse this trend. In fact, some experts are expecting further rises in 2022.
Two Causes for Concern
Thus, we’ve got two causes for concern. Firstly, prices move so much higher that monthly budgets become stretched, leaving consumers with no discretionary spending power.
The secondary knock-on effect of that could be global interest rate rises, which would not only hurt income-producing investments but also, further add to consumer pain as mortgage payments gradually increase.
Compounding the problem, there are also several unknowns, such as the supply chain crisis and the slow-motion meltdown of the Chinese real estate market.
An oversimplified but reasonable way to think of the supply chain issues is like a traffic jam. Just instead of cars, you’ve got ships. This appears to be gradually righting itself, but for now, it’s continuing to drive the inflation problem.
Less clear is what’s going on in China. The Chinese government appears to be letting market forces take their course. This may mean the collapse of some of China’s larger real estate firms. What’s unclear is who is holding the bag internationally?
While this certainly doesn’t appear to be another Lehman Brothers moment, it’s clear that hundreds of billions of dollars may be lost which may also affect the global markets.
Continued Growth in Tech Earnings Remains a Big Question
We’ve also talked about how privacy changes may impact technology company profitability. Google pushed off their decision to allow 3rd party access to cookies early in the year (3rd party tracking basically drives the whole Ad-Tech market). Apple has not been complacent, however. Their recent changes in iOS 15 have given people the option of being tracked in plain English. As would be expected, most have opted for privacy and this has hit some tech firms’ earnings this quarter. More on this challenge to technology will reveal itself over the next quarter. Fortunately, at this stage, advertising revenues continue to grow.
Lastly, we’ve got Covid and the new Omicron variant.
While the world had hoped that by now things would be basically under control given the effort and money put into vaccinations, it’s looking increasingly likely that we are stuck with Covid forever as it seems to mutate faster than we can vaccinate. The Omicron variant is so much more infectious that it is clear that there will be mass infections again this winter. Apart from the inconvenience, and the pain the virus has caused, we’re left with massive social costs for which the bill will inevitably one day come due.
Fortunately, the financial freedom program, which is our debt management and wealth-building system, was created in the 1980s for many of the same challenges we see today. While no one likes to see their investments decline during a correction, market volatility can be an opportunity. For many decades the combination of volatility and our program has allowed us to take advantage of crises when they appear so we can maximize financial flexibility and success.
As always, give us a call should you have questions or concerns.