I’ve been reflecting on the debate within the comments section around the tax policy announced by the government. Firstlinks is not a political publication and instead seeks to inform investors about topics related to markets and building wealth.
This is where politics and markets intersect. Various government policies impact markets and strategies to build wealth. The tax proposals are an obvious example. Firstlinks will continue to cover those topics.
However, I’m going to be stricter about what I let through in the comments section. There are legitimate concerns about the tax proposals. I personally share those concerns and I have several misgivings about the impact on the country.
Significant changes to the tax code should be debated. But – at least on this publication – the debate needs to be productive. Name calling may be edifying but it doesn’t help to inform readers so I won’t publish those comments going forward. I hope this helps to keep the comments section focused on the relative merits of various proposals.
Firstlinks will also continue to publish content on both sides of a debate. Public discourse isn’t helped by Australians retreating into echo chambers.
If your comment doesn’t get published feel free to email me at [email protected] with any questions. Please feel free to leave comments on Firstlinks’ editorial policy.
Should investors be a little more worried?
Recently I’ve been speaking to members of the Morningstar Investment Management team. I haven’t come away from these conversations overly confident.
Markets are forward-looking and represent investors’ collective view of the future. Those expectations are priced into markets. Understanding what investors are anticipating there is no context for valuation levels.
A seemingly reasonable valuation can look optimistic in retrospect if the bottom falls out of the economy. High valuations are deceiving if there is enough growth.
Investors are exceedingly positive. And maybe the market is right to be optimistic, and everything will turn out ok.
The Strait of Hormuz may open and energy prices may drop leading to lower inflation. AI might be all it is cracked up to be with infrastructure investments paying off. We might be at the precipice of an AI enabled surge in productivity.
Is everyone optimistic?
A closer look at what is happening shows not every investor is quite so optimistic.
Bond yields are surging and at their highest level since 1997. This may indicate bond investors are not as confident inflation will be transitory. The equity risk premium narrows when yields are high as bond become more attractive.
It is also worth looking under the hood of the share market’s narrow rally. The S&P 500 increased in value by $9.19 trillion in market cap from March 30 to the record close on May 11. The 10 largest companies by market cap accounted for 62% of that gain and the semiconductor sector made up 43.80%.
Perhaps the AI boom will continue and momentum will win out. Perhaps the shares being left behind represent the best opportunity.
In the midst of the boom leading up the global financial crisis Citigroup CEO Chuck Price infamously said “when the music is playing you gotta get up and dance.” Investors are dancing – the question is, will the music will keep playing.
Final thoughts
The rosy scenario priced into the market may not eventuate. And that is what investors should ponder. This is not a universal call to action or a warning. All long-term investors deal with volatility and predictions about the future are rarely worth the paper they are written on.
Instead, it is a call to assess your own situation and how different market scenarios will impact your life. It is the investor that matters and not the investments.
In this week’s edition Nick Maggiulli argues the more wealth you have the less risk you should take. Something to consider as this bull run continues.
Simonelle Mody extols the benefits of simplicity. She makes a compelling case.
John Abernathy warns against complacency given US fiscal pressure, China’s shifting growth model and Australia’s structural constraints. In his view the global investment landscape is becoming less forgiving - yet markets have yet to fully adjust.
A sustained disruption through the Strait of Hormuz is forcing a rapid drawdown of global inventories. Paul Gooden writes that without a resolution, the arithmetic points to a supply shock by early August and a sharp surge in the oil price.
In the face of inflation and potential interest rate increases infrastructure remains a safe haven. According to Magellan looks at different infrastructure plays and how they might be impacted by the current environment.
Several programs and policies are in place to help first time homebuyers. Little attention is paid to the needs of renters. Jason Teh looks at the historical drivers of rent levels and what policies could ease the recent rent increases.
As super balances grow, SMSFs are becoming central to retirement outcomes. Michael Hamilton says without proper planning for “Armageddon” scenarios, even well-structured funds can unravel when it matters most.
Mark LaMonica.
Curated by Mark LaMonica and Leisa Bell
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