The following issues feel urgent, but not all are important
Published Apr 14, 2023 • Last updated 58 minutes ago • 4 minute read
Traders work on the floor of the New York Stock Exchange. Photo by Brendan McDermid/Reuters files My noise-cancelling headphones are working overtime. In addition to giving my wife some private time, they’re helping me tune out the market noise that seems to be hitting a new crescendo.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors There’s much intense and conflicting talk about inflation, recession, banks, China, artificial intelligence, the war, the United States Federal Reserve’s next move and the never-ending U.S. election. These issues will impact stock prices (with one exception), but the speculation about what will happen when, and the inevitable predictions, do nothing to improve investment decisions.
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At our firm, we keenly observe the current landscape, make sure we understand it and have views on how things will play out. We don’t, however, base strategies on these views, but rather focus on businesses we own (or want to own), where outcomes are more knowable.
We make the distinction between what’s urgent (that is, in the news and being talked about) and what’s important. The following issues feel urgent, but not all are important.
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Article content Inflation This one ticks both boxes. Interest rates and the economy key on inflation. The things that drove the consumer price index (CPI) higher in 2021 have abated and goods inflation has dramatically dropped. The debate now is on how sticky housing and other service costs will be.
The wise old bond market is betting inflation will continue to come down. Yields are well below current CPI levels. It’s saying that inflation isn’t anything a good recession can’t fix.
Recession Speaking of the economy, there’s a consensus view (not just among bond traders) that we’re heading for a recession in the second half of the year. This view has become even stronger in recent weeks.
I have four things to add to the discussion. First, if we have a recession, it will be the most anticipated and longest anticipated in history.
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Article content Second, it’s important that we have one, even if it causes hardship (job losses). Recessions reset the economy by reigning in risky behaviour, driving efficiencies and getting management teams off their heels and focusing on growth.
Third, we need to be careful when comparing previous recessions to what we might face. There’s an important difference this time: labour markets are extremely strong. Recessions generally don’t occur when people have jobs, so if we have one, it may not look like any other.
Finally, investors must remember that stock markets will absorb the bad economic news and bottom before the slowdown is over, perhaps even before it starts.
The Fed The U.S. central bank’s move to normalize interest rates has dramatically changed the investment landscape, and Fed watching is at a fever pitch. However, the nuance around chair Jerome Powell’s words and body language has no impact on long-term returns. The Fed’s general direction is important, but the hype around its announcements is out of proportion with its effect. Personally, I ignore the Fed chatter and have much more time in my day.
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Article content Banks It would appear we’ve avoided the much-feared contagion from Silicon Valley Bank’s demise. So far, there hasn’t been a widespread run on the banks. If this is indeed the case, the debacle may prove to be a real positive: a shot across the bow causing bankers to be hypervigilant about their credit risks and balance sheets.
Artificial intelligence I’m both excited and scared about AI. Which way I’m leaning depends on the day. It’s clear we should all be learning as much as we can about AI since it’s already important and brings on myriad ethical issues. For investors, AI will be used for research and portfolio construction, but the important thing will be understanding how its deployment will benefit their holdings.
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Article content Ukraine war I hate to say it, but the world has largely adjusted to the war. At least, financial markets have. It doesn’t appear that peace, further escalation or more trade disruptions will have a meaningful impact on bond and stock prices.
China On the other hand, dealings with China are both urgent and important. Any further deterioration in trade relations could cripple how the world economy functions and businesses operate.
U.S. election Of the issues I’ve listed, the run-up to the 2024 election will likely get more attention, spark intense emotion and have the least effect on your portfolio. The two are not linked.
Indeed, election polls and Fed announcements are for day traders. Important factors such as inflation and China are the ones long-term investors should try to understand, recognizing of course that the outcomes are largely unknowable.
Tom Bradley is chair and co-founder of Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at tbradley@steadyhand.com.
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