A Comment -- General Comments From an Expert (A Commentary)

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. The Crushing Power of Interest Rates. Central Banks largely have one tool that they can use to curb excess demand, and therefore inflation, which is interest rates. Increasing interest rates cause economic demand to slow and decreasing interest rates are used to stimulate the economy. The Federal Reserve has historically raised interest rates when the labour market is strong and decreased interest rates when it is weak. As we know from this market update so far, the labour market is quite strong, which is why the Fed is comfortable with increasing rates, particularly at such a rapid pace. While many, including the Fed, are quite worried that a stubbornly tight labour market may keep inflation high for years, what we know from recent history is that rising interest rates have demonstrated their ability to dismantle a strong labour market. Unlock Premium - Try 5i Free

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Buy Some Long-Term Bonds. Bonds have been crushed this year, and long-term bonds have been decimated as rates and inflation surge. But if we are looking forward, remember that higher rates have a slowing impact on the economy. In a typical business cycle, rates rise, the economy slows and then, eventually, rates peak and start to fall. In a recession, and assuming interest rates do peak, long-term bonds could be one of the best-performing asset categories. This is impossible to time, of course, but investors today are simply ignoring bonds, and we think that is a mistake. Unlock Premium - Try 5i Free

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Don’t Overpay for Safety. Scared investors flock to so-called safe investments, such as food companies and utilities. Again, nothing wrong with this, and most companies in these sectors offer reliable, growing dividends. But investors need to be careful about what they pay for safety. Many companies’ valuations in these sectors are creeping up to high historical levels. Companies with historical average price-to-earnings ratios in the 15x range are seeing valuations bump above 20x. A change in valuation can still result in large losses, even with safe stocks. We would caution against loading up on safe sectors. Keep diversification in mind. Everybody has to eat, but because of low margins, inflation and higher interest rates can have a serious negative impact on food companies as well. No one wants to see their safe stock decline 25 per cent because they paid too much for it. Unlock Premium - Try 5i Free