North American markets today, viewed several hours before the 9:30 a.m. EST bell, look poised to start in negative territory, continuing yesterday’s drop in telecommunication stocks, weaker-than-expected housing numbers, drops in crypto coin prices and inflation.
The picture is not totally negative. At time of writing the S&P 500 is slowly improving and it is possible -- though not assured -- that it could go green during the morning. However, the likelihood of that happening is slim.
European markets are open at time of writing and all major indices there are in the red.
The safe havens of gold and silver are also down and the Euro, British pound sterling and Canadian dollar are all down against the US greenback, a reversal of the situation earlier this week. That could change further, according to Jeremy Thomson-Cook, Chief Economist at London-based payments specialist Equals Money. “Ahead of the Fed minutes …the dollar has crept up off the lows made yesterday. There is an outside bet that some members of the Fed are getting worried about being behind the curve on interest rate rises which would drive further US$ strength,” he says.
Thomson-Cook also points to the effect on the dollar of heavy drawdowns in crypto assets. “(It) turns out that bitcoin is not an inflation hedge,” he says.
Economists and analysts can be forgiven for parsing their words more carefully than ever previously when looking at the COVID 19 crisis. Parts of Asia including Singapore are returning to lockdown as they face new virus waves while Europe cautiously starts to re-open. The United States is rushing to a rapid recovery with some very mixed blessings including the abrupt change in the mask mandate which gladdened those tired of wearing a mask but confused some authorities. Canada is a patchwork of tightening and loosening restrictions.
That mix infuses and confuses the markets as well. Two of the main preoccupations at work are recovery-driven optimism and COVID--driven pessimism. Yesterday, although parts of the markets were down, we had some optimism, re-enforced by first quarter results from Walmart Inc. and Home Depot Inc. “Those are both emblematic of strength in the corporate sector and also of the consumer,” said Ross Mayfield, investment strategist at Baird in Louisville Kentucky in a Reuters report. “I mean you can’t have Walmart and Home Depot have blowout earnings without the consumer really stepping up spending stimulus checks, adopting ecommerce, as well as getting back into stores.” (Home Depot shares closed down, as investors apparently wanted a stronger outlook.)
Another large preoccupation at work in the market --inflationary fears – deserves serious attention because an inflationary future has the potential to affect economies, policy makers and markets alike, according to James Athey, Investment Director at Aberdeen Standard Investments in London.
Clearly these fears were one of yesterday’s downward pressures.
Dividing any debate neatly into two camps is always asking for trouble but it can help with understanding a complex topic. In one camp, monetarists and behaviorists see inflation as a function of too much money chasing too few goods or a self-fulfilling phenomenon driven by the consumption behaviors and wage demands, he explains.
In the other camp, some individuals, including central bankers see temporary phenomena such as economic reopening, supply side disruption and commodity base effects as combining to create a dramatic but fleeting tsunami of price pressures. They believe that once through this phase, we can expect a normalization of inflation rates and expectations.
The problem is that that inflation is a poorly understood phenomenon, and we may be a bit short of intellectual tools for grappling with it at this time. “We are experiencing unprecedented levels of macroeconomic uncertainty. None of us knows for sure what the future holds,” Athey says.
When putting oneself in the proverbial shoes of a moderately-experienced investor trying to figure out the day’s market news a fair degree of confusion becomes understandable.
The main problem is that most active investors have never experienced a truly inflationary paradigm and therefore can feel somewhat stranded, Athey explains.
However, while much of the market is changing and unpredictable, some things have not changed. “As ever the primary goal for most investors should be one of diversification and balance,” Athey says. “If inflation rises then all else equal so will bond yields but that doesn’t mean you should be selling them all,” he explains.
The good news now implicitly baked into equity prices borders on the euphoric. “Does that mean equities are to be sold? That’s equally unadvisable.”
United Kingdom equities continue to lag American equities in valuation terms without any of the structural issues plaguing the Eurozone.
Owning United Kingdom large cap stocks also means a significant allocation to financial firms and commodity producers which should both benefit in a rising inflation and rising yield environment. The traditional safe havens of gold and silver should also form a significant allocation in a portfolio for some inflation-proofing. Using precious metals as hedges is more comfortable than using crypto currencies, he says.
Disclosure: I do not own any shares in any company mentioned in this column. And I don’t own any crypto currency. Al Emid is a financial journalist author and broadcaster.