It probably comes as no surprise to hear the big names in industry are preoccupied with inflation. But there’s a widening consensus that US inflation is proving more of a problem than originally thought.
The labour market remains very strong, particularly because the participation rate of people in employment in the prime bracket of 25–54-year-olds has picked up. Supply chain inflation is also higher than average.
There’s still around US$500bn of excess savings in the US. That’s an enormous sum and will feed into higher inflation. There are concerns inflation will be higher than the market’s pricing in because it’s not factored in the resilience of those savings. That could lead to some knocks to valuations.
The conversation has also started to turn when it comes to artificial intelligence (AI). AI is grabbing a lot of investing headlines. But it also has possible ramifications for inflation. Some senior figures are concerned that there’s going to be a productivity boom triggered by more processes becoming automated, which could have unforeseen consequences for inflation.
Tough times are coming…or are they?
Higher inflation also inevitably brings about the question of interest rates. Broadly speaking, soaring interest rates are expected to slow. However, there’s still uncertainty about exactly when cuts will happen.
Markets are pricing in interest rate cuts. But the Federal Reserve and institutional investors are clear that rates should be higher for longer. This disconnect could lead to shocks. Markets are more susceptible to movement because a lack of clarity makes it tough to know where to turn.
There’s an almost unanimous notion that a slowdown in economic activity is coming. The stronger consumer backdrop means this has been pushed out, but it’s widely still expected as consumer spending power weakens, probably towards the end of the year.
This is showing up in cautious spending from companies. This is one of the most anticipated recessions in history after all, so it stands to reason that corporates are battening down the hatches. This also means that the knock to profits as and when a slowdown occurs is likely going to be less severe than in less-forecasted economic slumps.
A wider source of debate is when a recession hits the US and how deep it will be. There’s never been a recession in the US without high levels of unemployment, which could suggest that the contraction is still some way out. But that doesn’t help answer the question of what investors can do at this point of the economic cycle.
What’s next for the US stock market?
A focus on what not to do
Leading figures are doubling down on the importance of not making investment decisions based on emotion. That can be panic or excitement.
Now’s the time to make sure your investments are able to stomach ups and downs in the economy. A good track record of free cash flow and profit, and not too much debt are all good things to look for in a company.
Analyst in America – 3 US share ideas
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