Energy and calm: staying focused when both are in short supply

14th June 2022

Stock and bond markets have fallen again lately, in response to a worse-than-expected inflation report and souring consumer sentiment in the US.

Investors had hoped that rising prices were easing, and that the Federal Reserve would therefore not have to hike interest rates so quickly. But news that inflation was back on the up in May, driven largely by energy supply constraints, forced a rethink.

Markets now anticipate more aggressive action by central bankers to put a firm lid on this overheating saucepan. This steeper expected path of interest rate rises means that both stocks and bonds are worth relatively less in today’s terms – it is the flipside of the fact that cash on deposit will compound up in value that bit faster.

Meanwhile, a survey of consumer sentiment offered a glimpse into the minds of ordinary Americans, who up to this point have shown no great signs of worry. The latest data, however, revealed a pronounced drop in confidence, chiefly due to the escalating cost of filling a petrol tank – a familiar concern to many.

The short term outlook

In the short term, the outlook for inflation, and hence economies and markets, is highly uncertain. Some argue that central bankers – including the Federal Reserve and the Bank of England – have been far too slow to recognise the threat of inflation, and are now playing a game of catch-up.

The trouble is that interest rate rises take a while to filter through into the economy. Overdue and hasty tightening might only serve to further burden consumers already struggling to meet inflated expenses.

Indeed, you can argue that central banks are relatively powerless to tackle the causes of recent inflation. They cannot undo the rippling effects of global economic shuttering due to lockdowns any more than they can put an end to war in Ukraine.

And though strategic reserves of oil have been released, it will simply take time until fossil fuel production ramps back up to meet an insatiable demand – the transition to a greener economy cannot happen overnight.

Taking a longer term view

In the longer term, however, we can afford to be less anxious about economic twists and turns. Whether we enter a downturn or not, recessions are far from unheard of in the past, and moreover the relationship between economies and stock market performance is a looser one than you might think.

Markets tend to react very early to any hint of gloomy news ahead, and so prices often fall well in advance of official statistics confirming what we already knew.

What’s more, the corollary is true: prices recover faster and sooner than GDP measures, as investors look ever ahead.

Periodic bouts of volatility such as this are, unfortunately, part and parcel of investing. The best way to ride them out is, of course, to forget about them. Frequently checking the value of one’s portfolio is not the ideal remedy for anxiety – much as in any other context.

Instead, it pays to be reminded of the rationale for long-term investment: that quiet, unstinting progress taking place behind the scenes. To give but one example: the cordless drill, invented by Black & Decker in 1961, originally took over 38 hours of earnings for the average worker to be able to afford. Today, it takes just 54 minutes’ worth of labour.

You are not, in other words, investing in the hope that the economic news improves over the coming few months – but in the rewards that accrue due to competition and innovation, to those who stay the course.

Our best advice is to think of noisy market ups and downs as a testing distraction, and refocus on those unreported forces inspiring us all to do things a little better every day.

Important information
The value of investments can go up and down, and you may not get back the full amount originally invested.