We’re entering into a new financial era

The financial markets aren’t unlike every other aspect of society. They go through eras. In baseball, there was the dead-ball era, and then the live-ball era. In sports cars, there was the hot-rod era. In movies, there was the film-noir era, etc., etc., etc.,

Well, the same goes for the financial markets, too. Back in the 70s, we all remember the era of high inflation and uneven growth — yes, the dreaded era of stagnation (which, by the way, many economic observers are hoping we can avoid today!). Recently, since about the 1990s, we’ve had an era of very low interest rates, which led to growth, but also to some bursting of economic bubbles.

Catching up with inflation

Central banks inflation markets

Now, according to Mohamed El-Erian, chief economic adviser of financial services for Allianz, we’re entering into a new era: one in which the world’s central banks are trying to play catchup with inflation rates that are topping 8% or more, by increasing interest rates to levels not seen since, you guessed it, in past eras.

In this new era, according to El-Erian, bubbles are no longer a worry. However, what is worrying is the extent to which central bank can deal with in inflation. On the plus side, says El-Erian, the rather undisciplined times involved with near-zero interest rates are over. On the flip side, however, is the question of how much more disciplined central banks have become, whether it’s been enough, and what can be done in the near future.

Opportunities always exist

El-Irian believes that there are three tests to determine if central banks, such as the US Federal Reserve, are dealing with inflation properly. The first is whether financial conditions have tightened. He says yes. The second is whether the tightening has been orderly. He says it’s been “slightly disorderly.” And the third and final test is whether the banks are getting ahead of inflation instead of reacting to it. On this score, El-Irian believes things have to change.

Of course, the effect that inflation has had on investment markets has been significant. However, as has been a point of emphasis on these pages, even in tough or uncertain markets, successful investors can always meet or exceed their investment objectives if they create a sound plan with reasonable objectives and don’t overreact to market uncertainty.

ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.


Another day in the markets

The position I’ve taken in relation to the markets is that much of the fear and even panic has been proven overblown. Trump’s trade actions haven’t led to any catastrophes yet. In fact, the U.S., Canada and Mexico just reached an agreement on trade recently.

However, as we approach the end of 2018, a trend in the markets has become noticeable. Specifically, the stock markets may well finish down for the year, and current December levels are precipitously down in comparison to other years.

Fluctuations versus trends

In other words, what’s currently happening can’t be quickly dismissed as an aberration. In a nutshell, the markets are worried, whether anyone thinks it’s justified or not.

Now, there are a few things to look at when analyzing the current state of the markets. First, and as I’ve stated numerous times on these pages, trying to decipher investor sentiment is kind of like trying to read a crystal ball. It’s hard to make any sense of it, unless you know what to look for.

There are various factors why investors are becoming a bit bearish on the markets. Trump will always be a factor in this. He’s doing things differently, and many people just aren’t sure how it will play out. Although I’ve been rather consistent in arguing that Trump’s actions haven’t been as panic-worthy as some might think. China needs the American market. Trump knows this. China knows this. They both don’t want to blow things up.

Avoid stock-market psychology

Yet, broadly speaking, investors tend to be creatures of habit. Yes, Trump is a habit they haven’t gotten used to yet. But habit also suggests that when markets have increased for a period of time, they’re bound to decrease, too. And so now observers are expecting a decrease and, as I’ve stated before, investing often becomes a self-fulfilling prophecy. If people expect bad things to happen, they’ll try to make bad things happen.

Nevertheless, even with these expectations of a downturn, and even a recession, there are a couple of things to keep in mind. America’s central bank, the Federal Reserve, is expected to raise interest rates yet again, which means one of the world’s most important financial institutions still sees growth in some important sectors, including employment.

Also, in the end, it doesn’t matter if the markets go up or down in the short term. They generally always go up in the long-term. And, if you’re a knowledgeable investor who looks for opportunities regardless of short-term worry or panic, you will find returns that match or exceed your investment objectives. That has always been the case and will continue to be so in the foreseeable future. Just call it a hunch, or historical reality. Take your pick.

ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.


Yes, there’s positive news

So, it’s been a practice on these pages to preach a positive outlook despite potentially negative predictions. And, of course, if you look at much of the financial press, there is no shortage of predictions that bear caution for the future.

However, it’s time to put our money where our mouth is. It’s one thing to say there is positive news when everyone sees the negative. But, if you look hard enough, and that’s what our job is, you can find the good news. So, let’s start.

Let’s start on the home front

First, according to CBC News, Canada’s governor of the Bank of Canada, Stephen Poloz, says the world economy is strong. Specifically, he says — and it’s what we’ve been saying here for months now — that the current trade tariffs and trade-war prospects can actually have a positive effect on investor psychology when these issues are resolved positively, which has recently happened with Nafta. As a result, Poloz is signalling interest-rate increases by the Bank, and believes the stimuli that many central banks have utilized in recent years are no longer necessary.

Now let’s go to RBC’s Global Asset Management’s investment outlook for the fall of 2018. It says the U.S. economy is continuing to lead global expansion, the strength of the U.S. dollar will continue long-term, and inflation might be pushed higher, but not to “problematic levels.” In fact, RBC says “the consensus outlook for global growth in 2018 and 2019 remains the best since 2011.” I bet you haven’t heard that in the news a lot lately, have you.

Higher-than-expected growth

Finally, according to CNBC, Mohamed El-Erian, chief economic advisor for financial services company Allianz, says the recent downgrade of worldwide economic outlook by the International Monetary Fund (IMF) is too pessimistic. He says that the American economy, fuelled by government and household spending, as well as business demand, will help keep growth above IMF’s expectations.

So, it’s not just us seeing the positive among some of the doom and gloom. There is reason for optimism. And, regardless of what happens, good or bad, investors can always find opportunities where others don’t.

ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.

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