Warning to Investors: Inflation Rises to #1 Fear – Are Your Finances Safe?

And relax. After months of performative wrangling, the showboats of American politics have finally agreed to give the country more room to borrow, a move that extinguishes the risk of a potentially catastrophic default on its government bonds.

Avoiding a disaster in the so-called core risk-free asset of the world is a victory for common sense.

If you’re heavily invested in chipmaker Nvidia and other big-name American tech stocks, you’re living your best life regardless of all this pantomime. For everyone else, the debt ceiling deal is a rare jolt of good news in a worry-filled year, as HSBC nicely summed up this week.

“Recapitulating the first five months of 2023 feels more like a doom-mongering playlist than anything else,” Max Kettner, the bank’s chief multi-asset strategist, wrote this week. In addition to the fight over the US debt ceiling, fund managers have had to contend with a series of US bank failures, scares of a credit crunch and constant warnings of a corporate earnings horror show. .

Interestingly, risky markets have continued to rise anyway. Sure, US stocks in particular are dominated by a small group of high-flying names, without whom they would be flat this year. Opinion is divided on whether that is, in itself, a cause for alarm. Either way, the S&P 500 has gained around 10 percent so far in 2023 despite the long list of risks and loud warnings of impending disaster. Even Kettner, who has been bullish on risk asset prices all year, is growing nervous that this has gone too far.

The question now is whether removing a US default from the agenda clears the way for some strong new rallies in US and indeed global stocks. The sense is that it is a necessary precondition, but probably not sufficient by itself.

“The rally needs more,” wrote Mark Haefele, chief investment officer at UBS Global Wealth Management. “While the prospect of a [debt ceiling] resolution is positive for risk sentiment and may support equities in the near term, we continue to believe that the risk-reward balance for US general equities remains unfavorable amid other macro challenges.”

At the risk of sounding like a broken record, the first on that list of macroeconomic challenges is, you guessed it, inflation, the corrosive force that chewed up and spat out fund managers last year by hurting both stocks and bonds. Few are interested in a repeat.

The evidence that the dreaded i word just doesn’t back off is everywhere. The UK is something of an outlier, of course. But core inflation is proving annoyingly sticky, and food prices have risen nearly 20 percent in the past year. Reinforcement stuff. Meanwhile, the US Federal Reserve’s favorite inflation measure, personal consumption spending data, continues to perform. Earlier this month, core PCE was shown running at 4.7 percent a year, well above the Fed’s target. The rapid return to low, and above all, stable inflation stubbornly refuses to materialize. .

“People talk about peak inflation, but don’t see the next waves coming,” says Frédéric Leroux, head of Carmignac’s cross-asset team in Paris. “We’ve had the first spike, but there will be a series of them in the next few years.”

Too often, he says, investors and analysts infer that the rapid acceleration in price increases after Covid-era lockdowns had a large fixable source — the closing and reopening of global supply chains — and a less fixable one. : the war in Ukraine.

Instead, broader interrelated forces are at play, from relocation to the global geopolitical reset to the green energy transition, all of which point to higher structural inflation in the coming decades. “The market believes that inflation is transitory,” says Leroux. “It’s not.”

To him, this strengthens the case for active rather than passive fund management, to move away from growth stocks, particularly in the US, and toward unloved stocks instead. He is drawn to Japan, Europe, and Asia. “We have this big wave [of investor interest] from west to east,” he says.

Michael Saunders, a former member of the Bank of England’s monetary policy committee and now senior policy adviser at Oxford Economics, suggests this may be a bit bearish.

“Inflation won’t go away as fast as it came,” he says. “The ‘immaculate disinflation’ where it goes off and then goes off again seems less plausible now. But I think central banks will eventually get it done. So we won’t have structurally higher inflation, but we will have structurally higher interest rates to make sure it’s not persistent.”

This message is cutting. Expectations of a US interest rate cut to soften the blow from the strains on the banking system are now fading. Futures markets have gone from anticipating that the Fed’s next move will provide welcome relief with a cut, to expecting a one in three chance of a hike.

Strip away those high-flying tech stocks, and suddenly it seems like those doom mongers are still pumping out your greatest hits. Inflation is still the top of the bursts.

katie.martin@ft.com