December Investment Update

Executive Summary

• US Reporting season is all wrapped up and results beat expectations.
• Revenue continued to grow rapidly whilst profit margins remained near record highs.
• The next 12-months may however come with slower share market growth and more risk.
• A key area to watch is China as Beijing attempts to slow house price growth.
• Inflation is hot with the bond market seeing higher US interest rates in 2022.
• Much of the good news is already priced into share markets with several risks overlooked.

The strength of the recent US reporting season carried share markets higher through to early November. With few positive catalysts to follow, upward momentum faded and share markets mostly moved sideways.

Investors once again pulled out their list of worries. The list does not look much different to what it did 6-months ago. Supply chains remain stretched, most notably with the movement of goods. October US inflation data came in at +6.2%, the highest since November 1990. US labour shortages are not easing, with still more vacant jobs (10.4M) than unemployed workers (7.4M). Rising COVID-19 cases in the Northern Hemisphere.

However, it was the unexpected that rattled share markets most. News of a new COVID-19 variant, Omicron. The US S&P500 Index sold off rapidly recording its worst day in 8-months (-2.27%). Clearly investors remain very nervous about COVID-19 and more especially vaccine efficacy against the new variant.

Renewed COVID-19 restrictions could only intensify the challenges already on the worry list. Supply chain pressures would worsen as labour becomes even more scarce. All of this whilst demand for goods, as proven before is likely to remain strong ultimately sending prices even higher.

All eyes are on the US Federal Reserve Bank. Fed Chair Jerome Powell last week indicated they may need to speed up their plans to exit the $120B per month stimulus program. Ending these support measures and tightening money supply by mid-2022 will have markets paying attention. This is a difficult task and even more so with the Omicron uncertainty.

In this newsletter we highlight the strength of the recent US reporting season. Whilst this is positive, we would not expect this trend to continue as the business cycle matures. Central Banks know they need to remove emergency policy settings and that is not going to be easy.

If you have questions about investments please don’t hesitate to contact us to speak to one of our experts. 

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