So, the decorations have been packed away, the plans for a healthier lifestyle dusted down and the new diary open; intent on efficient working for the year ahead. There is certainly something revitalising about the fresh start of the new year; a clean desk, a new beginning – all wrapped up with a sense of optimism.
But notwithstanding such positivity, there is something unsettling about what the new year holds in store. It is as if 2021 offered some warning signs and we hoped that they would be temporary and disappear, but are there dark clouds looming for more difficult times ahead?
For the past decade the financial markets have been reliant on the stabilising effect of cash injections from central banks, supporting asset prices through their purchasing programmes. The often-cited worry of inflation never seemed to materialise and when it did start to become an issue last year, all concerns were mollified by the inflationary pressures being transitory. But now we’re into a different regime. The underpin of the central banks is at least pausing, if not reversing and we’re seeing a different attitude towards base rates as that inflationary threat grows.
Unfortunately, those inflationary pressures seem to be real. This morning’s news highlighted the bleak news of significant price rises in domestic fuel costs (circa 50%) as price caps become adjusted from April this year and the significant hikes in the wholesale prices are reflected in the domestic pricing. If the supply chain problems we witnessed sporadically across 2021 are replicated or exacerbated this year, this will only add to the inflation woes. Certainly, the forecast from the Annual FT Survey of economists, doesn’t look too sanguine. [i]
Against a somewhat gloomy backdrop in the ‘real economy’ I am struggling to work out what will happen in the financial markets, particularly when reading about Apple becoming the first company to hit a market capitalisation of $3 trillion alongside such strong growth in the share prices of Microsoft, Alphabet, Tesla and Amazon. Morgan Stanley’s view seems to be one of similar concerns, particularly in the US: “The persistent price outperformance of U.S. stocks for much of the last decade has been driven by superior and more durable earnings trends, but uncertainties are mounting around cost pressures, supply issues, policy uncertainty and tax changes,” says Mike Wilson, Chief U.S. Equity Strategist.”[ii]
Although there may be worrying signals out there, I take some comfort in Bentley’s second Law of Economics: “The only thing more dangerous than an economist is an amateur economist.” I’m certainly no economist, so perhaps I should instead focus on known facts, so I know that today the sky is blue, its not raining and it is only 74 days until Spring!
Happy new year!