The chances of a new big fall in the US stock market are growing.
The 10 biggest names in the S&P 500-based on their capitalization – are valued at 26 percent of the index’s total value. The top 50 companies – The New Nifty 50, if you will-surpass 56 percent of the index’s value, close to the rate they held a year ago when Wall’s decline began.
For over a year, profit margins have been under pressure due to inflation. They will be further squeezed if the economy goes into recession. Many companies are at risk of large increases in loan interest costs, particularly if they rely on floating-rate debt, are in pre-maturity bonds and/or have access to markets to find financing for their investments.
In 2021, the tech-weighted Nasdaq proved particularly vulnerable to high valuations and precarious profit margins, losing about 1/3 of its value. This year, other sectors may follow the path of technology, logically following the announcement of the results for the fourth quarter and the updated forecasts that will be disclosed within the next month.
Investors ‘ biggest mistake for 2023 won’t be that they won’t play defense. On the contrary: it will be their non-participation in what follows once the Fed declares its victory over inflation and loosens its monetary policy.
Raising interest rates in order to reduce demand is a tried and tested solution to dampen inflation in the short term. But rising borrowing costs are cutting investment. So when the Fed relaxes its policy, supply lags even further behind demand, driving prices even higher and exacerbating inflation.
For example, from July 1967 to August 1969, the Fed raised interest rates from 3.79 to 9.19%. From July 1971 to July 1974, the Fed pushed the economy into the” deep waters ” of recession by shooting interest rates from 4% to 13%. And from August 1977 to May 1981, the head of the Federal Reserve, Paul Volcker, sent interest rates from 4.75% to the beastly 20%, triggering a-near – global-scale recession.
Yet each time the Fed backed down, inflation returned with momentum. This was also the case in the 1980s, when after Volcker the dollar collapsed, the price of oil more than doubled within a year, and gold briefly returned to its historic high, surpassing $ 800 an ounce in late 1987.
Only the combination of consistent pro-investment fiscal and monetary policies, as well as the emergence of China as a low-cost producer, closed the gap between supply and demand and put an end to the high inflation of the 1960s, ’70s and ’80s.
It is a myth that many investors did not create real wealth in the 1970s and 80s. Simply to succeed they had to buy or put in products and assets that do well in times of high inflation. Market averages were not enough.
Today, the most popular financial media publish stories about investors postponing their retirement due to the losses they suffered in 2022. And unfortunately, those who bet on index ETFs to make up for the “broken” in 2023 will probably feel more pain.
Last year, however, it hid few opportunities for those who knew what to buy and operated on that knowledge. Most popular ETFs almost entirely lost that gain, due to the concentration of investors in the big names in technology.
Several of the investments that perform well in times of high inflation ought to be obvious. Energy, for example, is still at the beginning of a long-term upward trajectory, rooted in years of under investment.
Despite the preferences of governments in the developed world, oil and gas will remain the dominant sources of fuel for years to come. And policies that discourage investment in new drilling-as well as necessary infrastructure, such as pipelines – will exacerbate the long-term imbalance between limited supplies and rising demand.
Instead, governments fund the development of renewable energy. But profit margins for wind and solar power generation will rise along with higher oil and gas prices. The same will happen with the prices of key natural resources needed to develop renewables, from copper and iron ore, to metals to make batteries, such as nickel and lithium.
You may not have thought that the REITs benefited from inflation, since it increased rents and the value of land.
REITs give investors the advantage of owning real estate without the problems arising from managing it. The most successful in this category will see significant profits and increases in dividends and share prices in the coming years.
Companies that can pass on the cost increase to their customers will also prosper in times of high inflation. Their ranks include large players from a wide range of industries: from catering services to utilities. Even some bonds will come out profited, provided buyers are methodical in their purchases and insist on short-term maturities.
