Brace yourselves. The outlook for the global economy is not looking at all pretty. Jerome Powell has said as much.
The chairman of the Federal Reserve warned that the rate-setting committee is prepared to raise interest rates by a half-point in May. With US inflation at 8.5%, which is significantly higher than the Fed’s target rate of 2%, it would be irresponsible for the committee to react in any way other than decisively.
But even a 50 basis-point hike is unlikely to be enough. More aggressive interest-rate hikes could be needed to bring down inflation. Just how high the cost of borrowing might rise is anyone’s guessing. The market thinks that in the near term, it could climb as high as 2.7%, based on the 2-year Treasury note. It could go even higher.
J Powell said the aim of the Fed is to get demand and supply back in sync without triggering a slowdown that amounts to a recession. He admitted that it is going to be very “challenging”.
A better description than “challenging” might be “impossible”. It will be nigh on impossible to avoid an economic downturn unless Putin miraculously stops invading Ukraine, unless COVID-19 amazingly vanishes in China, and unless supply chains wondrously become reconnected overnight.
Miracles can happen. But investors should not be pinning their hopes on them happening. A better idea could be to look for shares that can do well in both good times as well as bad. And in the face of looming stagflation, these companies not only need to be resilient, but they also need to have robust pricing power.
Some companies have already begun raising prices. Nestle has pushed up prices for its products by more than 5%, which has helped it to produce organic sales growth of 7.6%.
Procter & Gamble said it had also increased prices by 5% that has helped it to achieve its strongest sales growth in two decades. Elsewhere, Danone has hiked prices by 5%, and price hikes were also implemented by brewers Heineken and AB InBev.
Point is, recessions are not anything that we, long-term investors, need to be afraid of. Traders are a different matter, altogether. But for those of us who have anchored our portfolios on shares with strong pricing power, we should be celebrating the fact that our dependable dividend income could allow us to buy more of the shares we like at better prices.
Recessions don’t come around too often. But when they do, we need to take advantage of the opportunity with conviction. Don’t ever be afraid of recessions.
In the words of Peter Lynch: “The thing to remember is that we’ve wiggled out of every recession since the one that turned into the Great Depression.” Don’t let anyone tell you any different.
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