With a new football season upon us, some brave managers will adopt the approach of attack being the best form of defence. It seems President Biden is taking a similar approach in his response to COVID-19, with spending and stimulus measures being viewed as the best form of defence against the havoc created by the virus.
The Senate Democrats released a vast $3.5 trillion budget resolution on Monday, which was effectively approved on Wednesday, meaning the budget could be passed over the next few weeks or months, with little the Republican opposition can do to prevent it.
The timing of the budget is interesting, given the US economy has recently returned to pre-pandemic levels following the release of Q2 GDP last week. With the economy recovering, inflation running at elevated levels and jobs being added back at an impressive pace, some will question whether such stimulus is required, or whether it should be saved for the next downturn. Will this lead to more persistent inflation? The market is clearly dismissing this scenario, with bond yields still historically low and little expectation of rate rises in the near term, even with inflation above target in US, UK and Europe. In Germany we have just seen inflation reported at 3.8% year-on-year, a 27 year high. Yet despite this, investors are still willing to lend to the German government at deeply negative rates, with the yield on the 10 year bund at -0.46%.
With rising inflation, low interest rates and low bond yields, it is strange that the gold price continues to lag, with the precious metal falling at the start of the week to circa $1745. Remember the precious metal breached $2,000 an ounce for the first time in August 2020. Gold in theory should perform well in this backdrop; falling real yields has historically been ideal for it, although we are not witnessing this at the moment. It’s rare that everything in a portfolio works at once; indeed the objective of a well-diversified portfolio is to ensure that assets perform in different ways to one another. Although gold has been lagging over recent weeks, more risky parts of the portfolio continue to perform well, with UK mid-cap equities advancing over the last week or so. UK M&A activity has been picking up, with international companies continuing to pick off UK assets. Meggitt was subject to a rival bid on Wednesday, with two US firms now battling it out for the company. While these events are great for the short-term share price, one may question the overall effects to the UK economy on a more medium-long term time horizon.
Like every football season the months ahead will be filled with success, surprise and disappointment with various management strategies constantly analysed by fans and pundits alike. In terms of investing, like all good managers we have an eye on the defence as well as the attack and are willing to tweak the strategy along the way to score as many goals as possible while trying our hardest not to concede.
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.