The world’s financial stock markets have continued to rise in recent weeks with Wall Street leading the way. In fact, upwards is very much the direction of travel at the moment. Bitcoin recently reached a new all-time high (before falling back again) and the Dow Jones Industrial Average Index has hit another record, while many other leading US indices are nearing their peaks. Even here in the UK, the likes of the FTSE Small Cap Index have been skyrocketing for most of this year. And crude oil prices have not exactly been stagnant.
In company news, electric car maker Tesla recently received an order to supply car rental firm Hertz with 100,000 vehicles, pushing its worth above the US$1 trillion mark. It now joins Apple, Microsoft, Amazon and Google parent company Alphabet in having reached this milestone.
In the US, the third quarter corporate earnings season has been nothing short of excellent: numerous companies have posted positive earnings per share and pleasant revenue surprises have come thick and fast.
One would expect this to herald further stock market gains for the rest of the year. But there has been a measure of market consolidation in recent days, with many fearing that inflation’s recent return might not be quite so short-lived as many had initially hoped.
Indeed, some of the leading central bankers may well be switching from mince pies to humble pie: in the UK, for example, the Bank of England has already signalled that interest rate hikes will be discussed in detail at its next meeting on 4 November 2021. This could well signal the end of this period of record low rates (0.1% since March 2020).
The Bank of England’s new chief economist Huw Pill has warned that UK inflation is likely to hit or even surpass 5% by early next year. Indeed, Food and Drink Federation Chief Executive Ian Wright recently told MPs that in the hospitality sector it was running at between 14 and 18%.
Evidence of inflationary pressures can be seen in other sectors as well: Procter & Gamble and Unilever have both recently announced price increases on some of their leading consumer products. And the Institute for Fiscal Studies has indicated that inflation and higher income tax would easily cancel out any small wage increases that millions of middle-class earners in the UK might be awarded.
This essentially means that the cost of living could rise at its fastest rate for 30 years. Disposable income will be hard hit and the situation is unlikely to recover before 2023. While the 6.6% increase in the Living Wage to £9.50 an hour is welcome, the fact still remains that UK employers are battling the worst labour shortages since the late 1990s. The story is similar in the US: plenty of jobs, but a dearth of enthusiasm on the part of employees – unwelcome news for Fed chair Jerome Powell, given his determination to achieve full employment in the US.
Gen Z and the millennials have replaced the baby boomers and now make up the lion’s share of the workforce, bringing sweeping changes to the way in which we work.
Their use of technology sets them apart from any previous generation. These are people who have never known a world without the Internet, smartphones and social media, all of which are fully integrated into their business and social lives. The lives of Generation Alpha babies – people born in the past ten years – will be shaped by quantum computing. And its development will be as relentless as everything that has come before it.
Why is this important? Because it will reshape the business world of tomorrow. Indeed, innovation and disruptive technologies are already heralding change. The workforce of tomorrow will oscillate between home and “hub”– indeed, new business hubs are already replacing the conventional office.
The pandemic has undeniably accelerated this transition from 9-to-5 to more flexible, tech-driven working patterns. Consequently, the businesses of the old-style economy will fail to attract and retain Gen Alpha workers.
Robotics and automation will loom increasingly large in the workplace. Indeed, some sectors (such as agriculture) have already embraced them for certain more arduous tasks. Actually, automation is nothing new. General Motors would most likely have folded during the Great Recession without it. And now, just as robotic automation previously helped the automotive sector tackle labour shortages, it is now used in electronics, food services and healthcare.
In the meantime, however, rising inflation and receding economic growth remain the biggest challenges for the financial markets. Only time will tell whether global investors’ appetite for equities starts to wane over the coming months. March 2020 saw the best start to a bull market in history: a pullback at some point is inevitable.
Goldman Sachs recently revised its economic growth forecasts for China – the second biggest economy in the world – down. It may very well do the same for some of the other major economies. While this does not bode well, the Federal Reserve Bank could still end up being right: inflation may well be transitory, and economic growth could pick up again once current weaknesses recede. It’s worth remembering that the post-pandemic recovery has generated the fastest economic growth rate since 1984. Some bumps along the way are to be expected.
Interest rates will have to rise at some point as central banks begin to reduce their monthly bond-buying programmes. Although this could impact the bond and equity markets, these are more robust than they were during the Global Financial Crisis.
However the economic or financial markets perform, nothing will shake our unswerving belief in the importance of owning quality businesses and having companies with pricing power. As Warren Buffett said, pricing power is the single most important factor when it comes to evaluating a business. This is definitely true in normal times. But during periods of extreme supply chain volatility, it takes on even more significance.