The acceleration of economic activity in the United States and Israel as a result of the progress of the corona vaccine campaign and the expectation of a corona crisis in more and more economies around the globe is reflected in an upward update of growth forecasts in these countries.
Expectations of accelerating economic activity coupled with severe failures in the global supply chain, both as a result of the corona crisis and as a result of weather damage, have brought with them a sharp rise in inflation expectations in economies that appear to be on their way out of the forest.
Some see the expected rise in the inflation environment as a short-term response to the sharp exit from a severe recession to rapid growth and believe that the corona’s economic damage, in conjunction with underlying inflationary factors in recent years, has curbed long-term inflationary pressures.
Others argue that the rise in future inflation is not temporary and that the massive incentive programs of governments and central banks will translate into high inflation of 2% -3% every year in the coming years.
The rise in US bond yields, which has led to a rise in long-term bond yields in Israel as well, is a direct response to a debate between those who see rising prices as a temporary phenomenon and those who see the corona crisis as a turning point in the inflation environment.
In the view of the two doctrines in relation to the inflationary horizon, the main reasons for expecting a rise in prices in the foreseeable future are the expectation of a strong economic recovery. If we compare the projected inflation to cholesterol known to us from the human body then it is good cholesterol and not bad cholesterol since the fruits of accelerated growth outweigh the rate of annual inflation damage of 2% -3% per year.
Investors fear to some extent that central banks will find it difficult to meet their commitment to zero interest rates over time and massive quantitative easing, in a world where inflation expectations are climbing but the sovereign debt mountain piled up during the corona crisis will lead central banks to postpone monetary environment adaptation. Even at the cost of temporarily deviating from the inflation target.
Investors, for their part, are currently conserving all of the above for the average life of the bond portfolio for fear of a sharp rise in yields, but should not manage the bond portfolio under a scenario of a sharp jump in long-term yields, as such interest rates are expected to be nil in the foreseeable future. Jumping at a rapid pace, it can be estimated that it will be the central banks that will curb the rise in long-term yields through monetary plans such as those that purchase long-term government debt at the expense of short-term government debt without increasing cumulative bond purchases.
Accelerated economic growth scenario is a comfortable operating environment for cyclical industries such as: banks, energy, industry, tourism and leisure etc. which suffered badly in the black days of the Corona plague and indeed since the consensus in the markets on man economic recovery, over-investment of value investments can be seen Which are more sensitive to high interest rates and priced with considerable optimism compared to value stocks.
Anyone who accepts the assumption that the zero interest rate environment is likely to accompany us for quite a few more years should assume that investing in the stock market will continue to be the most attractive investment in the world of tradable finance in the foreseeable future.
No doubt we are likely to see sharp realizations in response to economic data or geopolitical developments, but as long as we as investors assume that the corona is on its way out of our lives and base an investment strategy on it, it would be right to treat market declines as temporary decline and hunters’ patience and instincts.
On the one hand, one should not ignore the generous pricing of many growth companies and there have been quite a few recently, but on the other hand one should not get carried away by the panic of bubble slogans that color the newspaper headlines. Investors are faced with good investment tools to diversify their investments whether through investing in indices or through the help of experts who will build scattered portfolios for them that reduce exposure to a single paper priced to perfection. At the same time, it is possible to reduce exposure to volatile areas and those that are expensive, and to increase exposure to defensive sectors.
An informed geographical shift in the stock portfolio is also a good tool in the arsenal of investment tools designed to deal with challenging and varying pricing levels in economic activity between different countries. Using prudent hedging strategies whether through the derivatives market or executing long-short strategies may be a good solution for sophisticated investors in the stock market who suffer from a fear of heights.
History proves that scheduling markets is a low-success task and therefore only a long-term investment in the stock market, while making dynamic adjustments to the short-term investment portfolio based on the macro picture is the proven method for navigating the turbulent waters of financial markets. The vast majority of bubble forecasters missed a multi-year rally and at best envisioned a sharp and temporary realization and therefore the required investment solution is risk management rather than risk avoidance.