Up The Hill
It’s been almost 10 years since I rode a bicycle; mainly because it wasn’t my favorite activity growing up. Although I used to race my friends to the finish line, with time I had forgotten how to ride a bicycle. The closest thing I did to riding was watching the “Tour De France”; only because France’s landscape appealed to me.
Last Sunday, I decided to give it a shot again. I borrowed my neighbor’s bicycle. It has been gathering dust in the basement of our building. I struggled to keep balance, but that didn’t keep me from enjoying the great scenery of my hometown. The terrain was steep indeed.
A week later, I went cycling with my friends. We had to ride up a very sharp hill. To be fair, they did warn me. Eventually, with their help, I managed to reach the top and gaze at the beautiful scenery of the Mediterranean Sea surrounding Beirut City.
Why is this relevant?
This whole experience reminded me that these 10 years don’t only mark the period during which I stopped cycling; but, more importantly, the start of the 2008 financial crisis. Economies of the world – the U.S. in specific – were witnessing a tightening in their monetary policy, as the new Federal Reserve Chairman, Mr. Jerome Powell, had announced his decision to continue interest-rate-increase. He was motivated by specific economic indicators.
What about the market today?
Today, non-farm payrolls – although considered a coincident indicator – continue to add an average of 200K new jobs, per month. Weekly unemployment claims currently sit at near record-low, while the consumer price index shows a continuous yearly growth at 2.4%. This number is an indication that inflation has gained its momentum. Additionally, average hourly earnings continue to show a robust increase – a 0.3% growth in the month of March, which is a clear sign that higher prices of goods/services will emerge in the future.
Another steep, up-hill ride
I think it’s safe to say that this ride, just like mine was, will not be smooth. The market has gotten used to very low-interest rate levels and an excessive supply of liquidity. Today, the market will witness a thinner liquidity and companies will have to deliver an outstanding earning-growth the old fashion way; without the excessive use of financial engineering that prompted higher returns on equity and higher equity prices. Also, fixed-income investors will have to hedge against a decline in bond prices, as inflation yields and interest rate levels continue to increase in the future, in the absence of any event that would trigger the contrary. Having said that, investors will be forced to adjust their valuations and tactically allocate their funds across multiple asset classes. This will positively contribute to higher price swings and volatility across markets.
What will happen now?
Finally, the Federal Reserve, as well as other central banks who are pining for the beautiful view at the top of the hill, will have to closely monitor domestic and global indicators (stable inflation level of 2% and robust economic growth), as they embark on an uphill ride. Misguided steps, especially near the top, will cause them to stumble; if they were not cautious, they might fall all the way down to the bottom.