Inflation concerns mounting
Global stocks started the week near or at all-time peaks, supported by robust corporate earnings, with profit margins widening on average despite cost pressures.
Canada’s main stock index, the S&P/TSX composite index, shook off some mid-week blues as investors worried that accelerating inflation could lead to central banks raising interest rates more rapidly than expected, and traded near the record high reached on Tuesday.
The surprise inflation number in the U.S. – with the consumer price index reaching an eye-watering 6.2% on a year-over-year basis – continues to dominate investor focus. With economists predicting even bigger inflation jumps in the coming months, pressure for central banks to act will only increase. Earlier this month U.S. Federal Reserve Chair Jerome Powell said policymakers will be patient on hikes, but won’t hesitate to act if warranted by the inflation trajectory.
Bank of Canada Governor Tiff Macklem spent last week reassuring Canadians his central bank is more than capable of bringing inflation back down to its target, while admitting that even if inflation is “transitory” that doesn’t mean it will be short-lived. “Transitory to economists means not permanent, but to a lot of people that word means it will be over quickly,” he said, taking a stab at a more appropriate term. “It’s probably something like transitory, but not short-lived.”
The current environment is a challenging one for central bankers. Keeping rates at their current lows would allow the recovery to continue, but risk prices spiraling higher if households and businesses come to expect more of the same. Tightening would quell inflation not by addressing inadequate supply, but rather by stifling demand.
None of this means the world is in for a re-run of 1970s-style ‘stagflation.’ Back then, it took a decade of overheating and policy missteps to drive inflation above 10%. Central banks today are unlikely to make the same mistakes again. And unemployment is far below its 1970s peaks and continues to improve.
As markets continue to react and adjust to changing conditions, a continued focus on your long-term goals remains the best course of action. Investing through a well-diversified portfolio has historically provided the best experience through a combination of goals-based returns and reduced volatility over time.
• Short-Term View: Strong corporate earnings have propelled markets to new record highs earlier this week, but inflation is looking more persistent than previously thought as prices continue to climb.
• Longer-Term Thinking: Sticking to your long-term plan through periods of volatility is central to investment success.
• Logic Over Emotion: Perspective is key. Focus on long-term goals and timeframes.
“Many companies cite tight supplies and rising prices for key inputs – from labour to commodities to semiconductors – imposing cost pressures and the need to raise prices. Input price pressures and tight supply chains could squeeze margins in the near term, but this should begin to ease over the next 12 months as markets adjust.”
Brandon Harrell, Portfolio Manager
International Value Investment Specialist
Over the past 10 years, markets have been positive. Perspective is key.
Source: Morningstar Direct. Growth of $10,000 shown. Total returns from January 1, 2010 to Nov 11, 2021 in local currency.