The Stock Market Correction
The stock market corrected in the last 1 week. NASDAQ, a Technology heavy index, saw its peak in April. It has seen corrected by 7.5%. With NASDAQ as an indicator of the stock market, why did it correct? What is happening?
Rising inflation
Inflation has gone up by 4.2% year-on-year, as seen in the inflation data released on May 12. With it being the sharpest increase since 2008, why is this happening?
One of the reasons is because the inflation was low in 2020 due to it being a year of crisis. Hence, we are already starting with a low base before the rise. But there are other reasons too.
Supply not keeping up with demand
As more people get the vaccination and it starts taking effect, demand for goods will start to increase as people will start going out more often to spend. However, supply will not be able to catch up immediately.
Industries like mining and lumbering generally take place in developing countries. However, most people there have yet to receive the vaccination. Hence, these countries are still experiencing a severe lock down. As a result, many people are unable to physically go to work.
This will then result in a chain reaction of decreased and limited supply throughout the supply chain. As supply does not come on hand immediately, it will not be able to catch up with increased demand. This then increases the prices of goods and causes inflation.
Industries that supply raw materials, like mining and lumbering, have been hit hard.
1. Mining for Copper
Copper has risen by 50-60% since the start of vaccinations last October. This is due to Copper being an essential resource in many renewable projects.
Supply for Copper has unfortunately been limited as companies are not mining much yet.
2. Lumber
Lumber has climbed by 200% since last October. This is due to the increases in demand for homes; buying and renovating homes. Since companies have not been able to continue lumbering activities, the supply has also not been able to catch up with the increasing demand. As such the prices have also picked up.
How long will the inflation last?
I previously predicted that the inflation will pick up in 2021 but will be temporary. Looking at the trajectory of the inflation now, my opinion still stands.
This is because if vaccination can take effect for the larger part of the world, supply will eventually catch up because people will start being able to work in the premises. The imbalance between the demand and supply will start to balance and the inflation will start to ease.
However, places like India is still stuck in a severe stage of Covid-19. Hence, the situation will likely ease only in 2022.
Time for FEAR or time to SHOP?
The bouts of volatility is an opportunity to buy into a Growth company; companies that industry disruptors and grow much faster than their peers. However, there is no need to rush with the buy in as this phenomenon will continue throughout this year.
It is also a good time to buy into Cyclical companies. They are more sensitive to economy re-openings and their stock prices will increase in value as the economy reopens. This is an opportune time as the economic recovery is not over yet and will be continuing.
How should you position your portfolio?
It is important to have a balanced asset allocation but let us focus on equities. It is prudent to have a balanced portion of Growth companies and Cyclical companies, as tactical holdings, as explained before.
We should also keep a reasonable amount of cash so that we can buy into Growth companies when volatility comes. This window of opportunity will last for a year or so, and we should optimise it as investors.
If you have any questions about your personal investment portfolio or want to learn how to better reap the opportunity you are now having, feel free to reach me via heb@thegreyrhino.sg or 8221 1200.
Remember to leave comments and share this site with your friends. Do subscribe to my newsletter for updates and share this site with your friends too. I would love to connect with you.