A few weeks back I discussed the five biggest topics that were giving many investors, including myself, indigestion. I wanted to follow up on that article and how these issues not only impact the broader society, but our investments.

5.) Politics: I think the massive government spending during COVID (good and bad) had an underappreciated impact on inflation. So with government spending waning and the Build Back Better blocked, how will the economy and everyday Americans get back on their feet? In the near term, it means that corporate and personal tax rates won’t be jumping back up anytime soon. Corporations and wealthy Americas can breathe a sigh of relief. But it also means no big government stimulus spending. And without government stimulus, how much will that play into Americans going back to work? Don’t forget it’s a mid-term election year.

4.)  Corporate Profits: Corporate profits have surged to record levels recently. As important, so have corporate profit margins. After hitting a multi-decade high, margins are likely to contract in the face of higher wages and supply constraints. But how much? Which sectors will be able to pass on price increases to their customers and who won’t? So far, the biggest tech companies in America have dominated markets because they have seen their profits soar during COVID. As the economy recovers, other sectors should also see their bottom line rebound. Most notably is the industrial sector; it is expected to see the most significant jump in revenue this year (FactSet).

3.) COVID: Even as COVID mutates into other variants, the economy has become more and more resilient to its effects. In the past two years, the market’s attention has been focused on a few drug makers that had a vaccine or treatment for COVID. So what is to make of the rest of the biotech and healthcare industry? Vaccines make up just a small percentage of the industry’s trillion-plus dollars in annual sales.

2.) Inflation: This is the big headline for last year. Personal stories of rising gasoline and food prices remind us daily. In a year where inflation ran white hot, what is one to do? Inflation hedges like gold have performed horribly. Gold prices (prices gold dealers pay) are down around 3.5% this year. Since most of us aren’t gold dealers, returns for regular investors were worse. The SPDR Gold Shares (GLD) was down 4.8% this year, while Invesco DB Precious Metals Fund (DBP) was down over 7.5%. If gold and precious metals can’t rally in an economy like this one, then what is it good for?

1.) Interest Rates: Since my original post a few weeks ago, Jerome Powell has begun to chart a new direction for the Fed. If he proceeds as expected, short interest rates could rise to 0.50-0.75% next year. But what about longer-term interest rates like ones that determine mortgage rates? Longer-term interest rates haven’t moved in tandem. So unless longer-term rates move higher, the Fed might have little room to move short rates higher. These concerns about rising interest rates have caused the overall bond market to fall around 1.5% last year, one of its worst years in history.

Numerous macroeconomic issues continue to face investors; these are the various topics on our minds right now. And much like the COVID virus, the issues we will face will also evolve. What are today’s concerns might not be tomorrow’s problems.

/ben

For your convenience, use the following link to read the original market update published on November 29, 2021: Indigestion.

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