Sovereign Wealth Partners and InvestSense Pty Ltd
Markets finished the month of November down slightly as the economic impact of Omicron put investors on the backfoot.
Immediately having been confirmed as Federal Reserve Chair for another term, Jerome Powell came off the fence last Wednesday and declared that the inflation being seen in the US was not as ‘transitory’ as first assumed and that was likely to having a longer lasting impact on wage levels.
This has created a policy quandary for the Fed, and indeed most other central banks, between targeting overall employment and helping those that have been left behind. But with the mounting risk of too much inflation hurting everyone, the bias is towards the former approach and a quicker tapering of bond buying followed by rate rises later in 2022. That said, long-term bond rates still fell towards the end of the month as investors fear that the die is already cast and that policy makers are destined to tighten into a weakening economic backdrop and then to capitulate.
Many of the US tech stocks that bore the brunt of the selloff in the last week of the month were still up strongly in November and the latest bout of volatility probably reflects uncertainty around how to value these stocks in a confusing interest rate environment (they have typically been seen as a safe bet if interests stay low because of moribund economic activity). On the other hand, some commentators worry that the tightening of regulations for dominant tech companies in China could be a precursor of what is to happen in the West.
Central bankers have been very publicly avoiding leaning one way or another on inflation/rates for the past 3 or 4 months. The difference between them and investors is investors don’t get to decide what everyone else thinks but they (especially Jerome Powell) do. That’s why the last week of November was quite important as Powell’s targeting of jobs growth in the US for the most disadvantaged set the scene for everything else. Powell (and a growing chorus of his Fed colleagues and other central bankers around the world) appeared to change tack as persistent inflation shifted the balance.
Looking forward it will be important to consider whether this marks another regime change in central banking. Needless to say, this is all very much at the pointy end of our medium-term scenario analysis and potential tactical moves to adjust for this kind of normalisation, at least within asset classes. That means less US assets and less government interest rate risk (duration). It also has implications for longer term strategic goals and realistic investment objectives from this starting point.