Last week we saw the tech heavy Nasdaq post its largest daily decline since November of last year, on fears of inflation and rising bond yields. Worries in the market were calmed slightly by Chairman Powell’s comments on inflation, citing thirty years of lower and more stable prices. The tech sell-off continued throughout last week as investors shifted money to treasuries on rising yields, and more cyclical stocks as a result of strong U.S. consumer spending figures which posted the largest gain since June of last year.
Alongside these strong figures, average income was up 10% in addition to an increase in manufacturing output. Despite an array of positivity in the U.S. economy’s output, stocks ended the week on a weak note with the Dow posting a three-week low.
Although tech stocks recorded a mass sell-off last week, the Nasdaq was still up over 1% for the month. Rising bond yields have particularly affected tech stocks as their current price relies on future earning potentials, and these predicted earnings are discounted more as bond yields rise. The darlings of the market (Amazon, Google, Microsoft) posted large declines over the past week as money starts to flow out of growth stocks and into more cyclical areas of the market due to investors looking forward to an economic recovery. As retail spending increases and lockdown measures are eased, investors would do well to be putting capital into sectors such as financials, energy and other cyclical areas which have been so out of favour for the past year. Financials have seen a rapid recovery since the start of 2021 and have been amongst the best performing sectors in the S&P500 index alongside energy.
Despite Chairman Powell’s comments last week there is a still a massive concern amongst the investment community that inflation will rise amongst increased consumer spending coming out of covid restrictions. It is more than likely that the central bank will let inflation run away with itself in order to decrease the government’s debt and thus it would be prudent to have a strong hedge against inflation in a portfolio. The all too common hedges can include gold and other commodities, however there are other ways to hedge a portfolio which can serve as an investment as well as a hedge. Beneficial hedges which serve as an investment could be real estate investment trusts (REITs) or infrastructure companies/funds. This is because these sectors tend to have long contracts which are index linked, meaning that the price of the contract will increase every year in line with inflation, and therefore the income generated by these companies/sectors should post profits in line with inflation. The other good thing about having these kinds of companies/funds in your portfolio is that they aren’t solely reliant on inflation to do well and thereby provide a hedge if things go bad, and if the economy is doing well the sector of real estate and infrastructure should also do well. This could be a good win-win for anyone looking to build a smart, long-lasting portfolio.
Looking back on a week of quashed inflationary worries, rising bond yields and tech sell off’s, investors look forward to weighing up new leaders as growth stocks are seemingly replaced with cyclical ones. Despite continued volatility in the markets as a result of ongoing economic uncertainty, it is a good time for long term investors who have battled through tough market conditions over the last year proving the old adage of ‘time in the market’ rather than ‘timing the market.’ This philosophy is strongly carried throughout the Astra group as we look to serve clients’ financial goals by getting it right on a long term basis.
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