This week’s high inflation reading sent the stock market tumbling, but this sell-off creates buying opportunities of high-quality companies for the brave-hearted.
The inflation number is an economist’s or statistician’s way of numerically showing what we experience right now when we go to buy something.
Also read: 22 top tips for investing in 2022
In fact, even as I write this, I recall the car I used to fill up for $65 before the coronavirus crisis, now takes closer to $90 worth of fuel.
And the six pack I needed to buy after seeing my petrol bill at that level actually cost $23. It used to be $20.
Economists like me have been talking about supply chain problems linked to the pandemic and it’s why the US inflation rate is a crazy 7 per cent.
Our rate for the 12 months to December was a much more sedate 3.5 per cent.
The reading for the underlying inflation number, which takes out one-off jumps and falls in prices, was 2.6 per cent.
This was 0.3 per cent higher than expected and it’s why the stock market decided to go really negative on Tuesday when the inflation numbers were released.
Right now, stocks are sliding because we nearly always play follow-the-leader with the US stock market, which is afraid that its central bank will raise interest rates too many times this year.
Generally, the US Federal Reserve has indicated three rises are on the cards, but financial markets are now betting there will be five. And JPMorgan’s CEO, Jamie Dimon, shocked everyone by suggesting there could be seven. That led me - and others - to wonder, “What is he smoking?”
Interestingly, the history of early interest rate rises after a recession is that the market gets nervous about higher rates. However, stock markets actually rise in periods of rising interest rates… until the lift in rates gets too crazy high.
The past has shown that during a Fed rate-hike period, the average return for the Dow Jones Industrial Average is nearly 55 per cent. The S&P 500 gains 62.9 per cent on average, and the tech-heavy Nasdaq Composite has averaged a positive return of 102.7 per cent.
Inflation will ease
Rising inflation usually comes with fast growth but I think the opposite will happen over 2022.
Inflation will fall as the virus threat dissipates and this will help fix some of the supply chain problems.
Meanwhile, economic growth will pick up worldwide as we start to embrace a more normal global economy again.
Also I don’t think central banks are that dumb that they will look at the rising cost-created inflation and add too many interest rate costs onto the already-too-high inflation rates.
Sure, if my scenario - of an eventual booming economy after Omicron fades away - turns out to be right, the Reserve Bank of Australia will start raising interest rates this year but they won’t break any speed records to do it.
Governments and central banks want fast economic growth to help pay back all the debt they used in order to save us from a COVID-created ‘Great Depression’, so they can’t seriously kill off growth by giving us too many interest rate rises.
If I’m right, this should create the right economic setting to help company profits and stock prices.
That means the current stock market sell-off should eventually be seen as a buying opportunity.