Market Watch: September 2021
Global stock markets have experienced higher volatility in the second half of the year, after a very strong recovery from the lows in March 2020. The most recent concerns stem from China, in terms of regulatory interference, especially in the technology sector. The recent default by Evergrande, one of the largest property developers in the world with almost $300 billion in debt1, caused temporary ripples in the market, with fears of a contagion effect to other parts of the Chinese economy.
Another area that has investors nervous is inflation. Given the recent spikes in inflation, investors are worried of pending interest rate hikes, despite repeated assurances from central banks that they are not in any rush to do so. There has been much debate about whether the recent uptick in inflation is transitory or permanent in nature2. The consensus from the fund managers and economists that we've heard from is that it is likely a bit of both. Some of the sudden spike is due to increased demand after the global economic lockdown. This has been further exacerbated by supply bottlenecks that will eventually work themselves out. (Cars, for example, that can't be manufactured because of a shortage of microchips3.) Both things are likely transitory but what is more durable is wage inflation. Companies are offering higher wages to attract workers, and this cost is typically ultimately passed on to the final good or service.
The ongoing evolution of the pandemic is another thing that has markets oscillating between opportunity and risk. Concerns stem from risks to the healthcare system in some areas, where hospitals are being overrun with unvaccinated patients, to economic risks of potential further lockdowns. Fears of future variants are also weighing on many investor's minds, reminding us there may still be few chapters left in this story. Despite the sharp rebound in travel and other return-to-life areas of the economy, it is likely that growth is still being depressed as many are nervous about returning to "normal" with cases still climbing and a large part of the population (under 12s) not currently able to be vaccinated.
Stock valuations in many cases are quite lofty, particularly in the large US technology companies. On the flip side, the TINA effect (TINA = "There Is No Alternative") is keeping investors committed to stocks, and growth stocks in particular, as bonds and other asset classes are very unattractive currently.
The fund managers we work with feel that while there are indeed risks to be mindful of currently, there are almost always background risks, hence the saying "the markets climb a wall of worry." The current volatility we are experiencing-really, a return to the normal, even healthy, volatility that is associated with properly functioning capital markets-is something that we likely should get used to after a huge straight-line move off the bottom last year. There are a lot of positives that should continue to provide a wind at the back to markets; everything from very accommodative central banks, massive government spending initiatives such as the US infrastructure bill, and ongoing return-to-spent by consumers as COVID fears ease and supply bottlenecks open up.
We hope that you and your family are doing well as we continue to navigate this global pandemic. If you have any concerns or questions about your investments or financial plan, please do not hesitate to reach out.