Dear valued client,
Markets were on a wild ride Thursday as the U.S. inflation report came in for the month of September. The CPI hardly budged between August and September. Equities were trading lower at the beginning of the day as experts were expecting a bigger drop in prices given the three straight 0.75% interest rate hikes, only to rally in the afternoon to notch significant gains for the day. Moderate selloffs occurred today as underwhelming Q3 earnings reports from financial institutions such as JP Morgan, Morgan Stanley, and Citigroup were released. Balance sheets are shrinking across most sectors of the economy with increased interest rates.
To my eye, there are two main culprits responsible for lingering high prices; first, global supply chains and trade. Some of China’s major hubs only opened up from lockdown a couple months ago following their utopian “zero-COVID” policy. Effects of an economic disruption of this magnitude are often felt 6-9 months later, like an earthquake in the middle of the ocean producing a tsunami that hits shore at some time in the future. This, coupled with the Biden Administration’s current trade disputes with China, is causing pain, particularly in the microchip industry and technology sector as a whole.
The second main factor contributing to lingering high prices seems to be that the parasite of inflation has shifted hosts – from goods to services. This makes sense; if supply is reduced and the price of products increases, the labor associated with the implementation/facilitation of those products will also increase to maintain profit margins. For instance, if your car needs a muffler replacement, the mechanic will have to order the part at an increased price, and will likely charge you more for the time and effort to install the new muffler in order to maintain the same level of profit.
Price increases have infected a broad array of service sectors such as healthcare, education, and auto repair, among others. Airfares, for example, have spiked 42.9% in the last year.
Given the less-than-impressive inflation data, my guess is the Federal Reserve will add another 0.75% hike in their next meeting at the beginning of November. Canada’s September inflation numbers are set to be released Wednesday of next week.
As always, I try to provide some perspective in these ostensibly gloomy economic times.
Here are some interest rates on record over the past several decades:
1973: 13%
1980: 22%
1986: 16.17%
1991: 10.39%
1996: 7.8%
2007: 5.41%
As you can see, interest rates have been elevated in the past.
Now take a look at compounded returns on investment in the market over the same period of time:
$10,000 invested in 2007: $39,013
$10,000 invested in 1996: $105,868
$10,000 invested in 1991: $166,662
$10,000 invested in 1986: $262,366
$10,000 invested in 1980: $452,265
$10,000 invested in 1973: $853,673
When you look back 10, 20, 30 years from now, these relatively trying times will be but a faint memory. If you continue to be a long-term thinker, you will be a winner. The market will reward your patience.
“It’s remarkable how much long-term advantage people like us (he and Warren Buffet) have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” – Charlie Munger
Have a terrific weekend,
PW
