Navigating the Current Market: What Spikes in Inflation Mean for your Stock Portfolio

Market Daily Staff on February 16, 2024

Inflation in the US has become one of the most popular topics in headlines during the past few months, with many articles focused on why it is spiking and what can be done to bring it under control. The big question for investors, however, has been what to expect from the market as spikes in inflation continue to affect the economy.

“The general impact of inflation on the market is insidious,” explains Josh Answers. “It’s gradual and subtle at the same time, which is why gauging its real impact on the market can feel elusive.”

Josh is a financial streaming pioneer and 15-year stock market veteran who hosts the YouTube channel The Trading Fraternity as well as The Stock Market Live, where he streams live content seven hours a day covering the stock market and finance markets.

“The cold fact of the matter is that nobody really knows how the market is going to respond,” Josh says. “This is why a lot of people — myself included — flip back through history books to see what happened the last time anything like this occurred. Looking back at the track record of the 1970s, you find a lot of features that are similar to today. I would say the 70s provide us with a perspective to help navigate through this inflationary period.”

As Josh explains, inflation in the US in the late 1970s rose from 2.7 percent to 12.3 percent in less than 24 months. It then declined slightly for a year before jumping back up to 14.7 percent. During that cycle, which took almost a full decade to complete, inflation rates experienced numerous spikes and drops.

“Inflation doesn’t just surge up overnight,” Josh explains. “The spikes that we see are essentially the process through which inflation builds up or sheds down. Spikes in inflation in the 1970s pretty much came in two year blocks, and that seems to be the same trajectory we are on today.”

In April of 2021, The White House announced that inflation, which it identified as a possible effect of the COVID-19 pandemic, was a risk that it was “monitoring closely.” As inflation rose throughout the summer of 2021, the US Federal Reserve labeled it transitory, believing that the factors causing the increase would correct themselves. By January 2022, however, inflation in the US had hit a 40-year high and was continuing to climb. In recent months, experts have proclaimed that protracted, not transitory, is the correct terminology for describing this period of inflation.

“It’s hard to anticipate anything in this environment, but it is certain that volatility will plague us until we gain more certainty on where the economy and policy are going,” Josh says. “With that in mind, you shouldn’t be afraid of volatility, but you should be prepared.”

One approach that experts advise in the current market is maintaining a balanced portfolio and keeping a keen eye on cash balances. Although buying is not something that investors should fear during times of inflation, they should avoid positioning themselves too heavily in any one sector.

“At the later end of the inflationary cycles — the final spike — stocks tend to outperform, so there is nothing wrong with holding on to some growth stocks,” Josh explains. “Still, in an inflationary environment, dividend stocks are some of the best hedges as they provide stable income that usually increases on a yearly basis. The dividend yields can compound and help pad the stats if the volatility lasts longer than expected.”

Another lesson to learn from the inflation in the 1970s is that inflationary spikes do not last forever. Navigating the current market may be like sailing through a storm, but the storm will eventually pass.

“Any investor can outlast any storm with enough time and money,” Josh says. “There may be some economic pain with the market paying the price, but history tells us they always climb back. I preach the long-term portfolio and waiting it out. In some cases, investors are better off smashing their computer after buying a stock and not looking at its performance for years. If you are on the younger side, and have time on your side, a long-term approach and focus is the way to go.”

HSBC’s Remarkable Financial Performance and Future Plans

Market Daily Staff 2 on February 12, 2024

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A Leap in Profits

HSBC, Europe’s largest bank by assets, achieved an impressive financial feat in the third quarter of this year. The bank’s after-tax profit soared by a staggering 235%, reaching a remarkable $6.26 billion compared to the previous year’s $2.66 billion. This remarkable growth was also mirrored in its profit before tax for the same quarter, which jumped by $4.5 billion to a substantial $7.7 billion. This exceptional financial success was primarily attributed to the prevailing higher interest rate environment, which greatly benefited HSBC.

Meeting Expectations

Despite these outstanding numbers, they fell slightly short of economists’ expectations. Experts were projecting a third-quarter after-tax profit of $6.42 billion and a profit before tax of $8.1 billion. This divergence from expectations can be partially attributed to a $2.3 billion impairment recorded in the third quarter of 2022, connected to the planned sale of HSBC’s retail banking operations in France. However, it’s worth noting that $2.1 billion of this impairment was reversed in the first quarter of 2023 as the likelihood of the transaction’s completion became less certain.

Revenue Growth

HSBC’s revenue also exhibited a remarkable increase, surging to $7.71 billion in the third quarter, a significant rise from the $3.23 billion reported a year ago. Once again, this boost in revenue was largely credited to the higher interest rate environment. The favorable interest rate conditions supported growth in net interest income across all of HSBC’s global business segments. Notably, the net interest margin, a measure of lending profitability, stood at 1.7%, surpassing estimates and demonstrating a 19 basis points increase year on year.

Notable Shifts in Deposits

However, it’s important to mention that the net interest margin did experience a slight decline of two basis points compared to the previous quarter. This decline can be attributed to an increased number of customers shifting their deposits to term products, especially in Asia. HSBC remained transparent in acknowledging this shift.

Remarkable Year-to-Date Performance

Looking at the broader picture, HSBC’s performance for the first nine months of the year is truly remarkable. The profit after tax for this period amounted to $24.33 billion, a substantial increase compared to the $11.59 billion reported in the first nine months of the previous year.

HSBC Shareholder Rewards and Future Initiatives

In response to these impressive results, HSBC’s board approved a third interim dividend of 10 cents per share. Additionally, the bank revealed its intention to initiate a further share buyback program, which will amount to a substantial $3 billion. This buyback is expected to commence shortly and will be completed by the full-year results announcement on February 21, 2024. This commitment to rewarding shareholders has been a recurring theme for HSBC throughout the year, with three share buybacks totaling up to $7 billion and three quarterly dividends totaling $0.30 per share.

Financial Resilience and Future Plans

The buyback program, while beneficial to shareholders, is also expected to have a slight impact on HSBC’s common equity tier 1 capital ratio, or CET1 ratio, a crucial measure of financial resilience for European banks. Looking ahead, HSBC has strategic plans to reduce its CET1 ratio from the current level of 14.9% to a range between 14% to 14.5%. The bank also disclosed that its dividend payout ratio for 2023 and 2024, excluding notable material items, stands at 50%.

The Fed’s Cautious Approach on Rate Cuts: Insights from Chair Jerome Powell

Market Daily Staff 2 on February 12, 2024

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Federal Reserve Chair Jerome Powell recently addressed the speculation surrounding potential rate cuts, emphasizing a careful approach due to the delicate balance between under- and over-tightening. Powell’s comments, shared during a discussion at Spelman College in Atlanta, shed light on the Federal Reserve’s current stance and the uncertainties influencing their decision-making process.

Jerome Powell’s Cautionary Remarks:

Chair Powell asserted that despite the expectations of rate cuts in the first half of 2024, it is premature to confidently assume a sufficiently restrictive stance has been achieved. Powell highlighted the importance of avoiding speculation on the timeline for policy easing, urging a patient evaluation of the risks involved.

Market Expectations and Housing Implications:

Investors, anticipating rate cuts, are closely watching Powell’s statements. For the housing market, a potential loosening of monetary policy could translate to lower mortgage rates, positively impacting a frozen US housing market grappling with dwindling sales and record-low affordability. While Powell and other officials are cautious, investors foresee rate cuts potentially starting in the middle of the coming year.

Fed’s Policy Meeting and Economic Indicators:

The upcoming policy meeting on December 12-13 is expected to maintain interest rates at their current 22-year high. Powell and fellow officials remain vigilant, keeping the possibility of another rate hike on the table, particularly if inflation proves more stubborn than anticipated. The Fed’s preferred inflation gauge indicated a slight easing in October, contributing to a more favorable environment for the central bank.

Consumer Spending and Inflation Insights:

Recent reports from the Commerce Department revealed a moderation in consumer spending and inflation for October. The core measure of the Personal Consumption Expenditures price index rose 3.5%, down from September’s 3.7%. Powell acknowledged the challenge of gauging economic trends during a unique recovery from the pandemic.

Housing Market Impact:

For homeowners in America, housing costs are a significant concern. The 30-year fixed-rate mortgage has experienced fluctuations, reaching 7.22% in the week ending November 30. Powell emphasized the importance of carefully navigating the current economic landscape to avoid unnecessary damage while addressing inflation concerns.

Powell’s Perspective on Current Economic Challenges:

Powell acknowledged the unprecedented nature of the current recovery, marked by the third year of the pandemic. He emphasized the Fed’s commitment to moving cautiously, considering the restrictive level of current policies and the ongoing challenge of managing inflation.

Public Perception and Future Expectations:

Despite uncertainties, Powell declared that “the public’s expectations of future inflation remain well anchored.” While most consumer surveys align with this sentiment, the University of Michigan’s recent survey showed a rise in long-run inflation expectations.

Diverse Views Among Fed Officials:

Fed officials present a range of views on the current economic landscape. While some, like New York Fed President John Williams, anticipate a decline in inflation, others, including Fed Governor Michelle Bowman, express the need for further rate hikes to meet the 2% inflation target.

Takeaway:

Chair Jerome Powell’s recent remarks provide valuable insights into the Federal Reserve’s cautious approach to potential rate cuts. The delicate balance between economic recovery, inflation management, and public expectations underscores the complexity of the current financial landscape. As the Fed navigates these challenges, it remains crucial for stakeholders to stay informed and adapt to the evolving economic environment.

Investor Anxiety in China: A 25-Year Low in Confidence

Market Daily Staff 2 on February 12, 2024

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A Chilling Outlook for Investors

The economic landscape in China, the world’s second-largest economy, has left investors anxious and uncertain. Recent data reveals a worrying trend as China grapples with a decline in foreign investments, marking a significant milestone. This is the first time in 25 years that the country has experienced such a decline, putting into question its ability to attract foreign companies and investments.

The Data Speaks

The stark reality is evident in the numbers. Data published by the State Administration of Foreign Exchange (SAFE) shows that foreign direct investment (FDI) into China has taken a negative turn. In the third quarter of 2022, China’s direct investment liabilities were at a disheartening minus $11.8 billion. This represents a sharp contrast from the third quarter of the previous year, when the figure stood at a more promising $14.1 billion.

A Troubling Milestone for China

The gravity of the situation becomes apparent when one realizes that this is the first time the gauge has displayed negative values since records began 25 years ago. It is a clear indication that foreign companies are not reinvesting within China, but rather, they are withdrawing their capital from the country.

Defining Direct Investment Liabilities

To understand the implications fully, it’s essential to clarify what “direct investment liabilities” encompass. This category includes profits belonging to foreign companies that have not been repatriated or distributed to shareholders. It also includes foreign investments in financial institutions within China. This negative trend signifies a reluctance to repatriate profits and a decline in foreign investments within the country’s financial sector.

Geopolitical Tensions and Investor Caution

The reasons behind this unsettling trend are multi-fold. Geopolitical tensions undoubtedly play a role in this exodus, as the global political landscape becomes increasingly uncertain. However, foreign companies and investors are also growing cautious of the mounting risks in China. These risks include the possibility of sudden raids and detentions, which add to the sense of insecurity surrounding investments.

Vanguard’s Exit

A poignant example of this trend is Vanguard, the world’s second-largest asset management firm, announcing its plans to close its Shanghai office after December 2023. Vanguard’s decision stems from the sale of its stake in a joint venture with local partner Ant Group. The exit, which was initially reported by Bloomberg, indicates that even industry giants are reevaluating their commitment to the Chinese market.

Beijing’s Struggle

Despite Beijing’s efforts to reverse capital outflows and reassure investors, these attempts have fallen short of restoring confidence. One of the initiatives aimed at portraying China as an open market and improving trade ties, the China International Import Expo (CIIE), faced criticism from the European Union Chamber of Commerce in China. The Chamber described the event as more of a “showcase” than a concrete step towards facilitating foreign investment.

Seeking Solutions

In its endeavor to boost economic growth, China’s government has taken various measures, including approving one trillion yuan in sovereign bonds. These bonds are mainly directed towards funding infrastructure projects. Additionally, China’s sovereign wealth fund intervened in the stock market, one of the poorest performers globally, to help improve its performance.

Furthermore, the relaxation of capital controls in Beijing and Shanghai aimed to encourage foreigners to move their money more freely into and out of the country. The People’s Bank of China also engaged with prominent Western companies like JP Morgan, Tesla, and HSBC, pledging to further open up the financial industry and optimize the operating environment for overseas companies.

Lingering Skepticism

Despite these concerted efforts, global investors remain cautious. China’s increasing scrutiny of Western companies and an ongoing structural economic slowdown contribute to this apprehension. A survey by the American Chamber of Commerce in Shanghai underscored this skepticism, with only 52% of respondents expressing optimism about their five-year business outlook, the lowest level since the survey began in 1999. This figure has dwindled from 55% in 2022 and a robust 78% in 2021, highlighting the ongoing challenges faced by investors in the Chinese market.

The Unlikelihood of Rate Cuts and Why That’s Not So Bad

Market Daily Staff on May 29, 2023

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The Federal Reserve’s interest rate hike cycle has been a major concern for Wall Street, as it has battered markets and tested investor morale. While a pause in interest rate hikes seems likely, experts suggest that cuts may be farther off than expected. In this article, we will explore why the Fed probably won’t cut rates anytime soon and the potential consequences of cutting rates prematurely.

Why the Fed Is Unlikely to Cut Rates Anytime Soon

According to experts, the Federal Reserve is unlikely to cut rates anytime soon as long as the economy remains strong. They suggest that a rate-hike pause could be better for stocks than a cut. Although prices are stabilizing, inflation is still above the Federal Reserve’s two percent target, while American unemployment is at a record low. The US housing market is cooling down, but low inventory and persistent demand are pushing home prices higher in some parts of the country. These factors indicate that the Fed has no strong reason to pivot to lowering rates yet.

The Fed Cuts Rates Only in a Crisis

Kara Murphy, chief investment officer at Kestra Investment Management, stated that the Fed rarely cuts rates without some crisis in between. The last time the Fed slashed rates was in March 2020, after an emergency meeting. During this time, the Covid-19 pandemic caused US markets to tumble into the first bear market in 11 years. This resulted in some panic, as many feared that the global economy would go into a deep recession.

The recent collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank have raised concerns about potential turmoil in the banking sector and credit standards tightening. However, these disturbances have been limited to regional banks, and financial and economic leaders have assured that the banking sector remains stable.

According to Liz Ann Sonders, chief investment strategist at Charles Schwab, a significant downturn in the banking sector, labor market, or the economy would need to happen for the central bank to consider lowering rates in July. Sonders also added that the Fed would lose its credibility if it decided to cut rates without any valid reason after hiking them previously.

Cutting Rates Prematurely Could Have Grave Consequences

While the Fed may bring down rates soon, it’s not guaranteed to benefit the stock market. Credit Suisse’s report suggests that following a pivot to rate cuts, stocks tend to perform tepidly compared to a pause. The S&P 500 has historically climbed by 16.9 percent on average in the 12 months after the last hike of a Fed rate cycle, but it has fallen by one percent in the 12 months following the first rate cut. The analysts warn that the upside would be limited if the Fed were to ease rates in July. Premature rate cuts could have severe economic consequences, as seen between 1972 and 1974 when inflation rose sharply after the Fed cut rates.

The Fed is unlikely to be in a hurry to cut rates this time, according to Marco Pirondini, US head of equities at Amundi. However, a Fed rate cut this year is not completely out of the cards, says Nicole Webb, senior vice president at Wealth Enhancement Group. The Fed may want to lower rates back down, but it’s unlikely to do it at the historical pace it’s raised them over the past year. Webb suggests that the Fed can slowly pace the rate down to 2.5 percent without causing inflation to spike.

Final Thoughts

While a pause in interest rate hikes seems likely, experts suggest that cuts may be farther off than expected. Inflation remains sticky, and the economy has remained strong, making it unlikely that the Fed will pivot to lowering rates anytime soon. Cutting rates prematurely could also have severe economic consequences, as seen in the past, and could damage the Fed’s credibility. The Fed is unlikely to be in a hurry to cut rates this time, and while a rate cut this year is not completely out of the cards, it’s unlikely to happen at the historical pace the Fed raised them over the past year.

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Famous Investor Warns of an Ominous Bubble in the Financial Markets

Market Daily Staff on April 24, 2023

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Jeremy Grantham, the co-founder of investment firm GMO and the famous investor who predicted the dot-com crash in 2000 and the 2008 financial crisis, has sounded the alarm yet again. He warns that the markets are in the midst of one of the greatest bubbles in financial history, and the recent turmoil in the banking sector is just the beginning. The bubble, he believes, is set to burst, and the resulting economic downturn could be severe.

The Bubble and Its Causes

Cheap money has led to a frenzy in multiple US markets, pushing valuations of stocks, government bonds, real estate, and cryptocurrencies to excessive levels. This widespread exuberance has created a “pressure behind a dam,” and Grantham sees much steeper declines on the horizon.

The bubble in the stock market is particularly concerning as stock valuations remain “way above any long-term traditional relationship” to corporate performance. As the US economy enters a recession and corporate earnings begin to take a hit, the strain on the financial system could grow.

The Coming Downturn

Grantham sees uncomfortable parallels between the current market and the tech bubble of 2000 and the US housing market crash of 2008. What’s even more worrisome is that now, bubbles in the stock and real estate markets are poised to burst simultaneously.

This scenario played out in Japan in the 1990s, a period that unleashed a long economic stagnation that still haunts the world’s third-largest economy to this day. Grantham warns that the instances when people tried to break a bubble in the stock and real estate market together are “fairly ominous.”

The Way Out

Grantham blames central bankers for the inception of the latest market bubble. He believes their pursuit of some of the policies in recent decades artificially drove up the value of financial assets to high levels and set the stage for crashes.

He suggests that the current Fed chair, Jerome Powell, should follow the example of Paul Volcker, who raised interest rates to unprecedented levels to control inflation in the late 1970s and early 1980s. Volcker succeeded in suppressing price rises, though his policies also led to recessions.

Grantham warns that longer-term trends could prop up inflation for years to come. Climate change resulting in extreme weather and more intense and frequent natural disasters is disrupting the supply of commodities and raising food prices. In addition to that, aging populations also pose a risk as smaller workforces may command higher wages.

Investor Outlook

Grantham’s bearish views suggest investors should prepare for a rocky ride ahead. While there may still be opportunities to make money, the short-term outlook is grim as asset prices come back down to earth. Grantham suggests investors should “count on being surprised” as the bubble deflates.

Investors should exercise caution and consider their options carefully. It may be wise to diversify their portfolios and reduce their exposure to overvalued assets. Opportunities to make money will emerge as the bubble deflates, but the short-term outlook remains forbidding.

Analysts at Bank of America, Goldman Sachs, and Morgan Stanley have more optimistic outlooks for the markets. Still, Grantham’s track record of predicting market crashes makes his warnings worth considering as investors navigate the markets in the coming months.

Market Daily is your online source for daily market news and business updates. We cover the latest stories and trends in technology, cryptocurrency, the stock market, and the ever-changing IT industry. Learn more about our stories by reading through them on our website today.

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Oil Prices From Around the World Rise Above $80

Market Daily Staff on November 19, 2021

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As crude oil reached beyond the 80-dollar mark, prices of coal, carbon, and European gas have all hit record highs. With this upsurge, it has become apparent that an energy crunch, which would have an adverse effect on economic growth, is imminent.

In fact, Brent crude skyrocketed as much as 0.9 percent to $80.22 a barrel, achieving a three-year high for the second consecutive day before settling 0.6 percent lower at $79.09. It even posted three straight weeks of gains, whereas U.S. crude futures rose $1.47, or 2%, to settle at $75.45 a barrel, its highest since July, after rising for a fifth straight week.

Now that prices have been steadily rising for seven consecutive days alongside the energy crisis in Europe, analysts strongly foresee that they will continue to do so during surging demand and tight supplies.

Because European benchmark gas prices that are up for delivery next month have climbed another 10 percent, costs have doubled since the middle of August while the price of offsetting carbon emissions continued to rise, moving past €65 a ton in intraday trading last Tuesday.

According to investment bank Goldman Sachs, Brent could hit $90 per barrel by the end of the year, warning that rising input costs, higher gas prices and weaker growth were likely to weigh on European corporate profit growth for 2021. It raised its year-end forecast for Brent crude to $90 per barrel, considering that global supplies have tightened as a result of the fast recovery of fuel demand from the outbreak of the Delta variant of the coronavirus and Hurricane Ida’s hit to U.S. production.

“When growth slows, it becomes harder for companies to pass on higher input costs, which is the main risk for net income margins,” the Wall Street lender proclaimed. “While we have long held a bullish oil view, the current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts,” it added.

The said growth came into existence when the pound experienced its biggest one-day drop against the dollar on Tuesday, tumbling 1.3% to just under $1.3530 despite inflation fears. It was its lowest since January, as investors sought a safe haven in the dollar.

In an interview, Jordan Rochester, a currency analyst at Nomura, said that rising inflation concerns are making sterling-denominated assets less attractive. On the other hand, Brent crude has already gained about 55% for the year to date. West Texas Intermediate (WTI) also rose to around $75 a barrel.

In light of the recent developments, global oil demand is expected to reach pre-pandemic levels by early next year as the economy recovers. However, producers and traders from around the world shared that spare refining capacity could still weigh on the outlook.

As expressed by Greg Hill, president of Hess Corporation, global demand is seen rising to 100 million barrels per day by the end of 2021 or in the first quarter of 2022.