Stop complaining about stock prices because our economy is booming, for now
We live in strange times where good news about the economy is not good news for those with mortgages and those who want the stock market to start rising in a compelling way. As someone with enough experience in economics and the market, the best advice I can give you is not to complain!
Seriously, no expert really knows what lies ahead, but worrying about short-term stock moves is not a wise pursuit. Provided you are in good investments that have stood the test of time, good returns will eventually return. And that’s a promise.
I’ll get to the likely returns over time in a moment, but let me share the good news about the economy that could mean bad news for some.
Australia’s economy grew 0.9% in the June quarter to post a 3.6% increase for the year. CommSec’s Ryan Felsman reminds us that “normal” GDP growth is around 2.25%, so our economy is on the rocks, which I’ve been telling you about for ages.
The swing is so strong that in nominal terms the economy grew 4.3% in the June quarter and 12.1% for the year.
It’s huge, but it’s inflated by a high rate of inflation. When we look at economic growth, the ABS strips out the push for inflation to see what we’ve actually increased, but that 3.6% real growth is strong.
The concern with strong growth is that it could mean that inflation is not reduced by rising interest rates. On the other hand, you could argue that the July, August and September interest rate hikes are not in these numbers, so the September quarter numbers will be better to show us how the rate hikes are helping to reduce the risk. ‘inflation.
The only concern I have was the drop in the savings rate from 11.1% to 8.7%, but that was for April, May and June, and I’m sure there was a lot of spending after we exit Omicron closures and borders reopen.
Over the next few months we need to see data that RBA rate hikes are working and interestingly, Chris Joye, founder of Coolabah Capital, who writes a well-read column in the FRG weekend thinks the consumer sentiment numbers are at recession-like levels this quarter, which must be good for killing inflation.
It also reminds us that monetary policy works with a lag, so over the next two months we could see some very good indicators suggesting that inflation is falling.
I hope so, as this will help worried mortgagers and encourage higher stock prices as these readings imply less interest rate hikes.
Let’s get back to what to expect from equities once we see inflation easing and interest rate hikes reduced. Some economists are even expecting rate cuts at the end of 2023, but I hope they are wrong as this will imply a bigger threat of recession than I expect.
For those worried about stock prices, let’s just look at historical stock returns:
- Stock market returns since 1985 are 8.10% after inflation!
- Looking at the S&P500 for the years 1992 to 2021, the average stock market return over the past 30 years is 9.89% (7.31% after adjusting for inflation).
- If you had invested $100 in the S&P500 at the start of 1926, you would have approximately $1,066,955.03 at the end of 2022, assuming you reinvested all dividends. This is a return on investment of 1,066,855.03%, or 10.09% per year.
History says that a good stock portfolio, at least as good as the overall index, returns between 8 and 10%, even removing inflation. And that means that even if the bad news right now for equities due to inflation and rising interest rates lasts longer than we all want, very good returns are likely going forward.
And given that the combined action of governments and central banks averted a 1930s-style Great Depression, which would have destroyed your wallet, perhaps it would be fair to stop whining and wait for the stock market delivers as it always has.
You just need to be patient and understanding.