Holly's Blog: Why I and the S%P500 are VERY GRUMPY
Founder and CEO of Boring Money
1 Oct, 2021
My friends I am very grumpy this week. I am one of those people destined to live at the end of every queue. Whether it is loo roll, yeast, plain flour, a still-solvent gas supplier or flippin’ bloody fuel – I NEVER HAVE ANY! What happened to everyone else loving the joys of spontaneity!? I’m probably also going to shortly find out that everyone else has booked every flipping seat to flaming Benidorm next summer already. So don’t get mad, get even. I have a confession to make. So cross was I yesterday at politely waiting my turn, I did something very, very bad. [whispers] I booked my Ocado Christmas delivery slot. I have turned in THAT sort of person. Gah!
Maybe I have become the human embodiment of stock markets? The S&P 500 also had its worst day since May this week. What’s wrong with the Yanks? Inflation. And it’s not just the Americans - data released this morning shows inflation in the Eurozone is 3.4%. My days. The whole world is grumpy!
Why does inflation matter?
No one needs to be an economist to know that inflation is here. Rising fuel bills. The weekly shop. Most things we touch.
If costs start to rise, the powers that be use interest rates as the economy’s chill pill. This stops people from borrowing so much money and spending it. It’s like taking a sugar-loaded Fruit Shoot away from a toddler that is about to have a tantrum.
And higher interest rates make it more appealing to lend money rather than to buy shares
As interest rates go up, then some people start to re-think how they make their money work for them. And how and where they invest.
This is very logical. Everything we do with our money has some degree of risk. Cash is generally seen as safe and so interest rates are thought of as the ‘risk-free rate of return’. Currently in the UK this is Diddlysquat.
In the US, the interest you would earn if you lent the Government money for 10 years is about 1.5% a year ( “the yield on the benchmark 10-year US Treasury note is 1.49%” in techno-babble). And it’s rising. Hmm. So for all the Big Money Poobahs with mountains of money to manage, the decision-making factors have changed.
Here’s why. Imagine some shares which might go up by say 5% a year over the long- term. If your choice is between Diddlysquat or 5% you might be more inclined to take some risk, roll the dice and take your chances of making 5%. But as soon as that risk-free return becomes nearer 2%…..is the extra 3% worth it?? Discuss.
This is not just some academic exercise. I remember my last proper job back at Abbey in about 2005 (me + retail bank + annual performance reviews = even more grumpy than I am this week!). The poor team in charge of investments had permanent existential crises because their cash colleagues kept running promotions which paid people about 5% in various promotional cash accounts. If you’re offering customers a risk-free rate of return of 5% in cash – who’s going to buy your risky funds which your compliance head tells you only merit a claim of potential returns of 5% in the literature!?
So…………..worries about inflation = higher interest rates to calm things down = more people fancy cash products = less money in the stock markets = lower demand = lower prices.
Add general global chaos and fears about China to the recipe and it all leaves a bad taste in investors’ mouths.
Every cloud and all that…………
But enough, you all cry. Tell us something cheerful, for God’s sakes! I hosted a webinar on Tuesday night with guests from Scottish Mortgage Investment Trust and financial planner, Dennis Hall. It was a really interesting reminder to look beyond all the short-term noise and to focus on growth. Opportunity. Not taking views on regions or sectors – not slavishly saying “I must have 20% in the US”, or “10% in technology” – but just looking for very good companies which make a case for increasing revenues by 4 or 5 times as they grow. For our more confident readers, and those interested in a deeper dive into how fund managers think about specific companies such as Tesla and Moderna, it’s worth a listen on catch-up.
Dennis also shares his views on the benefits of splitting any investment portfolio into a) core (sensible, typically low-cost passive funds in mainstream markets) and b) satellite (some spicier bits on the side) – and why he uses investment trusts to supply much of his clients’ spice.
I must end with a shout-out to Dennis who is off to Morocco today to compete in the Marathon des Sables (where you basically run 6 marathons in 6 days across the Sahara)!?!?! Wow. Boundless admiration. And good luck to our own Boring Anna and all our readers who will be taking part in the London Marathon this weekend. I will be on my sofa eating cake, searching Facebook for open petrol stations near me, surfing flights to Benidorm and praying that Boris doesn’t say anything about getting the Army in to “Save Christmas” or I will have explosions of rage!
Thank you to all our lovely readers who left us reviews on Trustpilot this week. That was in fact a lovely part of my week. The team and I are genuinely grateful for all the very kind feedback.