NEWS, VIEWS & TRUTHS (18/01/21)

Published on: January 18, 2021

Good morning everyone, I hope that you all had a fantastic weekend.  It feels rather strange delivering this weekly piece at the beginning of the week rather than the traditional Friday, but as they say, a change is as good as a rest.  If you prefer the Friday delivery, just let us know; otherwise, welcome to this week’s News, Views and Truths.

After quite the tumultuous market of 2020, 2021 has started with a bang.  Since the opening of global markets in the new year, the FTSE 100 is up 5.32%, the Japanese Nikkei 225 is up 3.91%, the MSCI Emerging Market index is up 6.32% whilst the US market is lagging with the S&P 5400 up only 1.05% (source: Morningstar).  There is no doubt that the news on vaccine successes, delivered at the back end of 2020, is continuing to push the global stock market up, creating a positive starting backdrop for the year ahead.

However, the market is moving on from this topic and is now beginning to look closely at the United States and anticipating the increased fiscal stimulus that President-Elect Joe Biden will inject into the world’s largest economy.

The expectation is that now the Democratic party controls all three divisions of the US legislature, the level of stimulus will be expanded from the anticipated $900bn, with some commentators suggesting a package north of $3trn.  

Now, in a world of eye-watering fiscal programmes, with governments looking to prop up their economies as a result of the Covid-19 pandemic, $3trn may seem small change.  But it is the method of this proposed stimulus package that will have such a significant impact upon the global economy.  And that means it will have an impact on your investment portfolio.

The expectation is to deliver this support package, directly into the hands of those that need financial assistance.  And by direct, I mean that the US government will simply write a cheque to everyone; no ifs, no buts.  Free money.  Helicopter money.

And this is the factor that needs consideration.  You see, it has been assumed that, since 2008, fiscal and monetary stimulus would generate inflation.  And yet, it never appeared.  The reason for this was down to how and where the money was delivered.

Post-2008, the banks received it, with the hope they would lend to the population to stimulate growth.  What they actually did, was to hold onto this free cash, shoring up their balance sheets therefore not creating the ”trickle-down” effect that was anticipated.  Money did not flow into the economy and as such, inflation continued on its downward trajectory.

Now that the reverse is happening, US citizens receiving cheques with no requirements as to how they spend this, the anticipation is for inflation to rise and rise sharply.  Current US CPI stands at 1.2%; it is now conventional thought that this will rise to above 2% in the coming weeks, with one notable industry commentator suggesting that US inflation will hit 3% by May.

And the US Federal Reserve has confirmed that they are perfectly happy with this, targeting a 2% inflation rate and allowing inflation to rise above this, following periods when inflation was sub 2%.

Many regular readers of this weekly blog will remember my predictions for this scenario during 2020 and how we were preparing our portfolios for an inflationary market.  Furthermore, with bond yields rising significantly over recent weeks, it feels like the perfect storm for low-risk investors which, again, we predicted last year.  

Naturally, we feel very comfortable with our investment positioning at this time and hopefully, our clients do, too.  It has been a fascinating 12 months in market terms and I do not expect 2021 to be anything but a repeat of this.       

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