As the summer quarter rolled into its final month, investors and traders returned to their desks from their mimosas, golf courses and beaches. All hands were back on deck, influencing the heavy turbulence in the investment seas. That’s been par-for-the-course this year, of course.
Unlike 2018, this year’s trembling investment portfolios do not seem to be rattling central bankers’ resolve, with seven of the world’s major central banks having raised their policy rates over the month. Chief among the moves was another US Federal Reserve rate hike, adding another 0.75% to its policy rate, now registering a rate of 3.25%. And to underscore their resolve, Chairman Powell declared:
"We have got to get inflation behind us. I wish there were a painless way to do that. There isn't."(1.)
Perhaps he is finally summoning his inner Volcker?
Moving in lockstep (though earlier), the Bank of Canada did much the same as its US counterpart. Even the Swiss National Bank upped its rate 0.75%. For the first time in many years, the Swiss rate is no longer negative, having exited September with a rate of 0.50%. Needless to say, these moves to make money more expensive played a meaningful role in causing market waves over the course of the month.
In searching for other indicative contributors to this year’s market spasms, The Buffett Indicator is notable to review. Created by famed mega-investor Warren Buffett, it gauges how much value investors place on stocks compared to the size of the economy, as measured by the Gross Domestic Product (GDP).
As evidenced by this reproduced chart(2.), the indicator reached an all-time high heading into this year, with investors valuing the stock market at more than twice the value of economic production. Is it fundamentally practical to believe this could be sustained?
The indicator has dropped from its high, surpassing the correction experienced during the Great Financial Recession of 2007-2009 on a percentage basis. Some suggest this is sufficient evidence to suggest this year’s correction has run its course. Caveat Emptor.
Lastly, a brief reminiscence about the 100-year bonds Austria issued a mere two years ago, at an interest rate of 0.85%. Some dubbed this an absolute genius move by the Austrian government, locking in its debt load (at least this portion of it) at a record-low rate for 100 years. Alas, in the world of investment deals, for every winner there is also a dud on the other end. In this case, investors who lent Austria money two years ago have seen the value of their bond holding cut by more than half. Yet more investment victims as interest rates march higher. It may not be farfetched to think these Austrian bonds will become legacy, rather than investment, heirlooms for their original buyers, unless they’re willing to take a significant haircut to liquidate into cash.
For a review of the market numbers for September, check out the Monthly Market Pulse page, where you can also download a PDF copy of the commentary and numbers.
If you’re looking to learn more about how your investment portfolio is affected by these factors and are looking for better and more creative investment guidance not susceptible to default narratives and agendas, please connect with us.
Together to self-ownership and happiness so we can win at life,
Adrian Harasymiw Investment Advisor Pinnacle Sovereign Investments of ACPI
1. PBS Newshour