Let’s be honest, this hasn’t been a great year for most investors. Equities have fallen, and bonds have been hit hard by rising interest rates. When the typical safe-haven investment (bonds) doesn’t deliver, you know it’s tough sledding.
A big contributor to the pain in equities and fixed-income, of course, has been inflation. Inflation surged due to the consequences of the pandemic, namely large government stimulus packages and big supply chain problems (everyone seems to have a story about waiting months for a car or dishwasher to arrive).
Soaring inflation has led to soaring long-term interest rates, and it’s also the reason central banks have been raising the short-term rates they control. Rising interest rates are bad for bond prices, and bad for stock prices, too. Hence, the double whammy of falling stocks and bonds.
It’s completely understandable if you can’t bear to look at the markets these days. We know that markets rise and fall, but as necessary as the falling part is, it’s never fun, and it always seems to drag on.
And while we won’t try to predict when markets will meaningfully turn around, we do want to emphasize that there are good reasons to be optimistic.
- Inflation May Well Have Peaked
For all the talk that inflation is high and here to stay, growing evidence suggests it may have peaked and is heading back down to more regular levels:
- Supply chain issues have largely been resolved. The cost of shipping from China to the U.S., has come down significantly, for example.
- Growth in the money supply—often a leading indicator of inflation—has sharply declined
- Governments are no longer engaging in massive stimulus programs, meaning that fiscal policy shouldn’t cause the same degree of inflation it did early in the pandemic
Falling inflation would allow central banks to take their feet off the gas, slowing down their campaign of rate hikes. Meanwhile, bond yields, no longer driven higher by fears of inflation, ought to decline as well. Both these developments would be great for fixed-income, and likely equities as well.
- Even if Inflation Stays Elevated, It’s Not the End of the World
We’re big fans of U.S. investment expert Ben Carlson, who writes A Wealth of Common Sense. In a recent blog post, he made some compelling points in light of fears investors have regarding inflation:
- The U.S. consumer has continued to spend, despite of high inflation
- Businesses have seen their profit margins expand
So even if inflation does stay high, the outcome for investors may not be as bad as commonly believed.
The bottom line? Inflation has everyone fearful, but perhaps the only thing to fear right now is fear itself. Better days will reappear—after all, they always have.
