Easiest time in recent memory to invest

Stock markets have rallied on the back of delicious inflation data and falling interest rates. That was it for central bank rate hikes in the light of current data. In addition, China is increasing liquidity and relations with the US have seen signs of warming. 

In this post, I’ll talk about how easy it is to invest nowadays. Just wait and let me further justify this provocative-sounding argument. Then, we’ll look at some good inflation news to reinforce the picture that interest rate peaks will be a thing of the past.

Investing is easy for a change

A brief provocative thought to start with. Investing in today’s environment is easy. I stumbled upon a totally random person’s comment in X, where they wrote that “isn't this the easiest time to invest in living memory?” The rationale was: “Value stocks are cheap, small companies are cheap, foreign stocks are cheap and you get 6% on short interest.”

That thought started to go around in my head and I think it is apt in its amusing provocation. Two years ago, investing seemed easy, as shares were rising, and trajectories of skyrockets lit the night-sky-colored screens of traders but in fact it was hard to get a reasonable return on stocks because there were expensive stocks everywhere. Bonds didn't yield anything, which drove FOMO-addled people to take risks.

Now the situation seems dire after two years in a down market. But, as I have said in several posts, stocks are cheap in Finland and around the world. Also in the US, if you exclude the super-popular mega-techs although they are such behemoths of capital accumulation that they deserve high multiples. In Finland, I don't think you can get 6% on fixed rates, but you can already see 3-4% offers on deposit accounts and 3-4% on short rates. Investors don’t have to take equity risk to get a safe return. In addition, the stock market is full of companies with dividend yields above 5% or even close to 10%. You don't even need to look for good buys when they hit you in the face after a two-year decline.

Investing has become easy for the first time in a while, and you don't have to reach for the stars and then fail miserably to get returns. 

Inflation is easing, but...

Inflation has been the driving force behind stock markets for the past two years. The big theme of the past stock market year has been equities adjusting to higher interest rates. The good news is that inflation has been on a clear downward path for months. This provides certainty that interest rates will stop rising and possibly start to fall in the coming years.

There were also welcome inflation figures from the US. Consumer prices rose by 3.2% on an annual basis. Month-on-month, prices stayed put, so an optimistic interpretation would be a complete halt in price increases.

But let’s not get ahead of ourselves. Core inflation, stripped of volatile energy and food prices, ran at an annual rate of 4%. Now, the lagging shelter costs are also starting to properly cool down on price rises. Even these figures are well above the central bank's artificial yet all-important 2% target.

Since inflation has become such an important driver, it's fashionable to dissect it. For example, the Atlanta Fed publishes a "sticky" version of inflation. This includes price changes in categories that change very slowly, such as baby clothes, car insurance or the estimated shelter costs, among other things. The good news is that, on an annual basis, the rate of increase has been waddled to 5%. The bad news is that annualized inflation over the past three months has actually accelerated from 3.3% in July to 5% in October. However, the annual change in the more rapidly changing price categories has turned negative. And the three-month annualized inflation rate fluctuates wildly.

Even the Fed's favorite measure - super core inflation - excluding the slowly updating and estimate-based shelter costs calmed down month-on-month after a dubious rise in recent months.

Although inflation is cooling, it hasn’t fled far away but lurks around the nearest corner. Inflation-fueling wage growth has cooled in recent months, according to, e.g., the Atlanta Fed's Wage Tracker. However, wages are still rising at an annual rate of more than 5%. Although the labor market has shown slight signs of weakness recently, the unemployment rate remains very low.

 
Unless the economy goes into recession or cools down more than expected, there is a real risk of inflation accelerating again. After a fierce economic growth of 5% in the third quarter, the US economy is expected to continue growing at 2% based on the Atlanta GDP Now measure.

Thus, in the light of current data, a sharp fall in interest rates isn’t a realistic expectation, unless something royally hits the fan in the economy. The interest rate market expects the Fed policy rate to start falling next spring, but it will remain at just under 4% in two years' time. These expectations are likely to be wrong because it’s difficult to predict the future, especially the future of inflation, but these are the best guesses in the market.

Despite Tuesday's decline, the US 10-year interest rate - the gravity of the global financial system - is still in the 4.5% range. A level that few if any could have expected a couple of years ago. The US federal government is going into debt at a rapid pace, and there is no end in sight to the deficits because the population is aging there too. The country's credit rating is rarely touched, but symbolically Moody’s put the AAA rating under a negative outlook. Public debt and its impact on economic growth and hence on equities is definitely a topic to be explored further in a future post. In this context, I’ll just say that it contributes to pushing up interest rates as investors demand higher returns. For the first time in a while, capital is a scarce commodity.

All in all, the inflation figures were definitely good news for equities, but at the same time it’s worth keeping expectations calm about falling interest rates. The peak in interest rates is behind us for now, but without crises, rates are unlikely to fall quickly. The risk of the economy overheating and inflation returning is obvious. In this post, I won't discuss the long-term dangers of inflation. However, if you're interested, I did talk about inflation and its long-term drivers in a post in September entitled Round 1 of inflation has been won, but... The Goldilocks scenario, where the economy roars along while inflation remains low, is possible but perhaps not the most likely one.

If the economy stays on track, inflation stays a little higher and interest rates do not fall terribly, an investor can consider the investments mentioned at the beginning with great interest.

Thank you for reading the post! Read analysis and make good stock picks!