At first sight it seems somewhat illogical. Why should stock markets be rising when there is so much uncertainty around? Doesn’t the market realise that there is unprecedented geopolitical risk in Ukraine that could explode into something quite awful.
What about inflation? Supply-chain disruptions that were caused by the pandemic has pushed up the cost of just about everything. To make matters worse, the unprovoked invasion of Ukraine by Russia has interrupted energy supplies that has exacerbated inflationary pressures.
Meanwhile, the US Fed has indicated that it is prepared to be more aggressive in tackling inflation. There is even talk that a 0.5% hike in the Fed fund rate could be possible when the rate-setting committee meets next time.
With interest rates on the rise, inflation at levels not seen in decades, and conflict on the doorstep of Europe, why are markets still so sanguine? Market commentators have tried to explain – or is it putting a spin on – what is happening.
Point is life goes on. And with excess liquidity in the global economy, all that extra money has to find a home. Cash, to be blunt, is virtually useless in an inflationary environment. What good is interest rate at 0.5% when inflation in the US is running at 8%. Even 10-year US Treasury yields at 2.4% isn’t going to be nearly enough.
There is also a belief that whilst central banks might like to talk big about being aggressive with interest rates, they will also want to tread carefully lest they push the global economy into recession. That might be unavoidable if households should rein in their spending.
So, what should we do now? It’s really quite simple. The war in Ukraine could go on for a long time. Inflation could persist and central banks could be behind the curve. The upshot is that we are on our own….
…. We have always been on our own. We need to put our money into assets that can keep pace with inflation. That means investing in companies that can raise prices under all conditions.
The market is hunting for precisely those types of businesses, which could explain why it is rising. If you already own these types of company, then hang onto them for dear life. Their share prices might go down as well as up. But the cash and dividends that they could produce are considerably more dependable.
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