Taking Stock – The Big Question

By David Henry, Investment Manager at Quilter Cheviot

This is an excerpt from Quilter Cheviot’s regular newsletter ‘Taking Stock – Diary of an Investment Manager’, in which David discusses the direction of travel for inflation and looks at lessons from history. The original article is available here…

“2020 – the year of the Tiger King, but also the year of shapes. Talking heads on financial channels would line up to debate how the recovery for the economy, and for the stock market, would look. Would we get a V-shaped recovery, a U-shaped recovery or a K-shaped recovery? The list was seemingly, and tediously, endless.

This year we are being treated to a similar debate about the ‘flations. What happens to inflation is (at the moment) the primary issue for stock markets as we move through the second half of the year. The mooted potential outcomes are below as a reminder:

Inflation – prices go up from here.
Deflation – prices go down from here.
Disinflation – prices continue to go up, but more slowly than previously.
Stagflation – economic growth slows, but prices remain stubbornly high.

For what it is worth, I sit more in the camp that we are going to begin to get inflation under control during the second half of this year, and that prices will start to fall as we move into 2023. We are living through a very strange economic period; a real-time experiment of what happens when you shut off the global economy for a year and then let consumers, feeling relatively flush with cash, back out into the wild again. This summer, we are seeing what my colleague coined revenge spending – “we have not been on a proper holiday in three years, so let’s have two this summer”. You can see this attitude showing up in credit card spending, which is up pretty materially year to date, but that is a conversation for another day. The point is that I think we are seeing a lot of pent-up demand which will eventually pass through the system – like a snake eating a football.

Ultimately capitalism will always try to find a balance between supply and demand, and supply chains are beginning to rectify themselves. Housing, water and fuels have been large contributors to the rapidly rising inflation that we have seen during the first half of the year (per the below chart) – if you have filled your car over the past few weeks, you will have noticed that prices are starting to come down. We saw some softer data in the US last week too, which would corroborate the conclusion that we are getting a handle on inflation…”

The value of your investments and the income from them can fall and you may not recover what you invested.

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