What caught my eye this week.
Last week the major US exchanges leapt higher after a strong signal that US inflation may finally be cooling.
That was welcome news for markets and investors.
You’ve probably heard the old warning about staying invested: if you miss just a few of the very best days, you can miss most of the returns. Here’s that idea in practice:
On the surface these look like modest gains for a whole year — but they occurred inside just a handful of trading sessions.
I have a complicated relationship with the “don’t miss the best days” argument. As a frequent market watcher, I feel the swings of a year like 2022 quite intensely. That makes me wonder whether missing the very best days could ever be acceptable if it meant avoiding the worst ones too. Theoretically the safest—but wildly impractical—strategy this year would have been to stay in cash the whole time.
(That’s impractical because very few investors can consistently time the market; the success stories of those who have managed it are exceptions, not a playbook most should follow.)
Begone foul pestilence
The inflation news matters a great deal. In fact, it carried more weight for markets than the US mid-term elections, which dominated headlines for weeks.
From CNBC, the latest consumer price report showed a smaller-than-expected monthly rise, suggesting inflation pressures may be starting to ease. The CPI increased 0.4% in October and 7.7% year-on-year, below estimates. Core CPI, which excludes volatile food and energy components, rose 0.3% for the month and 6.3% annually — again lower than forecasts.
Regular readers know I’ve been expecting inflation to moderate for months. It took longer than many hoped, and interest rates rose further than most predicted this time last year. Market expectations were repeatedly surprised, producing a brutal year for almost every asset class. Many high-growth US stocks that had already fallen steeply dropped another heavy chunk of value in single sessions this year. Crypto crashes contributed to some of those moves, but persistent inflation and higher interest rates were the main forces behind widespread de-rating across equities and the pain in bond markets.
If US inflation has indeed turned, we may be close to the bottom of this bear market. US interest rates heavily influence the attractiveness of US assets and set the tone globally. Faster-than-expected rate rises pushed the dollar higher and lifted borrowing costs worldwide; if inflation recedes, some of those pressures can unwind. Markets tend to anticipate future moves, so a cooling of inflation expectations could prompt meaningful gains.
Leave your chickens uncounted
That said, this isn’t a guarantee that rate hikes are finished. Market-driven interest rates moved quickly as traders priced in future hikes, and some additional tightening from central banks that are still trying to catch up remains likely.
If inflation is on a clear downward path, though, peak rate expectations may be behind us, and mortgage rates — which many central banks would prefer to be lower — could start to drift down too.
Of course, risks remain. A fresh geopolitical shock, a surprise reversal in data, or later revisions to CPI figures could change the picture fast. Investing always involves uncertainty, which is why most long-term investors are better off staying broadly invested rather than trying to time the highs and lows.
Have a great weekend, all.
From Monevator
Our updated guide to help you find the best online broker – Monevator
Rich friends, poor friends – Monevator
From the archive-ator: Gagadom and the Grim Reaper – Monevator
News
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Jeremy Hunt expected to lower the threshold for the top 45% tax rate – Guardian
Recession looms as UK economy starts to shrink – BBC
House price rises ‘grind to a halt’ as lettings market grows, says RICS – Housing Today
UK interest rates predicted to peak next year at lower-than-expected 4.5% – This Is Money
Treasury discussing raising the energy price cap from April – Guardian
London’s new lord mayor calls for UK wealth fund to back businesses [Search result] – FT
Stolen $3bn Bitcoin mystery ends with a discovery in a popcorn tin – BBC
Couple on £84,000-a-year benefits let girl sleep covered in poo next to dead dog – Metro
Looking for alternatives: the investment trust route [Search result] – FT
Products and services
Gifts, food, and travel budgeting tips for Christmas 2022 – Which
How to join Mastodon, the open-source Twitter replacement – Cnet
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Is now a good time to buy your first home? – Which
Regular savings accounts explained – Be Clever With Your Cash
Why are so many energy smart meters in Britain turning dumb? – Guardian
Eco-homes built for biodiversity for sale, in pictures – Guardian
Comment and opinion
Vanguard: the alpha disrupter [Podcast] – Business Breakdowns via Apple
Three excuses editors give for not featuring index funds – Evidence-based Investor
How should you choose your asset allocation? – A Wealth of Common Sense
Is now the time to rebalance? – Vanguard
Yield is for farmers [Note: Fund tax stuff is only US relevant] – Fortunes & Frictions
Sequence of returns risk and retirement – Evidence-based Investor
A reminder of the virtues of A Random Walk Down Wall Street – CityWire
There’s method to the madness – The Motley Fool
Are bonds a better bet than stocks right now? [US but relevant] – Morningstar
Stealth wealth – Financial Imagineer
Crypt o’ crypto, aka crypto is FTX-ed mini-special
Cryptocurrency giant FTX collapses into bankruptcy – BBC
FTX collapse is looking a lot like crypto’s Lehman moment – Felix Salmon
…as Coinbase reiterates why it believes its customers are safe – Coinbase
The FTX collapse is an incredibly stupid catastrophe for crypto – Slate
FTX, RIP [Binance takeover since failed, but it’s a great take] – The Diff
Another good [pre-deal failure] take on how FTX failed – Amy Castor
Crypto prices plummet as the FTX contagion spreads – Kitco
Naughty corner: Active antics
When the moat is in your mind – Intrinsic Investing
Do the cheapest active funds beat index funds? – Humble Dollar
Growth may be ephemeral. Profitability is not – Verdad
Varied valuations for TikTok owner ByteDance [US but Scottish Mortgage also owns] – Morningstar
RM is not a good stock for dividend investors – UK Dividend Stocks
Kindle book bargains
No Rules: Netflix and the Culture of Reinvention by Reed Hastings – £1.99 on Kindle
How Will You Measure Your Life? by Clayton Christensen – £0.99 on Kindle
Why the Germans Do it Better: Notes From a Grown-up Country by John Kampfner – £1.19 on Kindle
Your Next Five Moves: Master the Art of Business Strategy by Patrick Bet-David – £0.99 on Kindle
Environmental factors
Visualizing changes in CO2 emissions since 1900 – Visual Capitalist
Coastal dwellers not being warned of risk to property prices of rising sea levels – Sky
Greenland’s melting ice sheet brings an unexpected flow of wealth potential – Hakai
Mild with a chance of catastrophe – Klement on Investing
10 reasons why ESG won’t be stopped – Morningstar
Off our beat
Twitter is cigarettes – The Reformed Broker
Where we’re at with macroeconomic forecasting – Noahpinion
Andor is what Star Wars is meant to be – Wired
Will Amazon’s huge HQ2 office in the US prove to be a white elephant? – Protocol
There’s an awful lot going on at Elon Musk’s Twitter – The Scoop
Warnings over the rise of 3D printed firearms – BBC
Using your tickets – Seth’s Blog
And finally…
“Spending money to show people how much money you have is the fastest way to have less money.”
– Morgan Housel, The Psychology of Money
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- Like the war in Europe.[↩]