During a recent briefing, Treasury Secretary Janet Yellen warned that US interest rates may have to increase "somewhat" to keep a lid on inflation if President Joe Biden's latest spending proposals are enacted and the economy heats up. Her comments sent stock prices tumbling as the market is concerned that a rise in interest rate will put pressure on the economic recovery. Yellen later clarified that she was not predicting nor suggesting the Federal Reserve should raise rates. "I really doubt that we're going to see an inflationary cycle," although she expects "somewhat higher inflation for the next several months" due to technical reasons that are likely to be "transitory." The Labor Department's data showed U.S. consumer prices increased by the most in nearly 12 years in April as booming demand amid a reopening economy pushed against supply constraints. In the 12 months through April, the CPI shot up 4.2%, from a low base last year. Stock market rally has stalled due to concerns on rising inflation, and while the market has recovered since the drop, investors are looking out for other possible inflationary data that may fuel an earlier than expected rise in interest rates.
A New Wave of COVID-19 Surge in Asia
The new wave of mutant strain of COVID-19 lead to a spike in cases in Japan, Taiwan, Thailand & Singapore targeted lock-downs have sent the stock market tumbling. The fall is especially acute in Taiwan, which has been seen as a safe haven for the past 1 year.
The uncontrolled outbreak in India and the spread of a new double mutated COVID-19 virus has lead the headlines all over the world, but the Indian stock market has been resilient so far as the government refuses to enact any meaningful lock down so as not to disrupt the ravaged Indian economy. This however, comes at a high price to the health of its citizens.
Meanwhile, in US, the government has started vaccinating teenagers and declare that anyone who is fully vaccinated can move around mask free. The US economy seems to be humming along and the test will come to see if a mutated virus strain can penetrate the vaccine shield thanks to their aggressive vaccination. If US does not see a sharp spike in COVID related hospital and death rates, the world will have found the recipe to get out of this pandemic conundrum.
Governments around the world are managing a balancing act, whether to prioritize on the economy or the lives of it citizens. As investors, we wish for the economy remain open to booster the stock market, but as a human, we hope that human lives are valued. This phase will too pass as the health organizations around the world work through the population to get people vaccinated against the virus and the current scare in the stock market will also pass.
Portfolio Strategy
The market has rallied from the market correction in March during the month of April. However, due to fears of rising interest rates during early May, we lost some ground back to the market. At this moment in time, the is gyrating around the February highs, taking a much needed breather from the back breaking rally since April last year. It is expected that this sideway movement will go on for a while longer before the market will find its legs again. As much as we are worried about inflation having an impact on the stock market, we have to remember that having some form of inflation is always healthier than having a deflationary market, so we are going from an abnormal recession deflationary cycle back to an inflationary one, which is a welcome improvement for the economy for the long term. Patience and dollar cost averaging is the best way to ride out any stock market uncertainty and the market will always reward the patient investor.
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