Buy the dips while the cycle keeps rolling on: this market will deliver

Volatility is back as we hit a mid-cycle of the global recovery – serious investors will stay in this market.

While a degree of complacency has crept in, my key message is to be prepared for volatility. Now is the time to be disciplined with your asset allocation and don’t panic by selling too early. Picture: Getty Images

It’s been a cracker of an earnings season in the US this August. We’ve seen not only better than expected corporate earnings but the fastest rise in over a decade has helped push equity markets higher, spurred on by vaccine rollouts.

But those rollouts are also worrying markets. As we know only too well, on the eastern seaboard of Australia, the pace of the rollout must accelerate or Covid-19 will take over again as a theme upsetting markets – and starting to dominate as a negative news cycle.

While the vaccine rollout in Australia has been slow, in many other parts of the world, such as the US and Europe, it has stalled. Deteriorating economic news and the resilience of Covid is as much a global theme as it is a domestic one.

The challenge for investors planning asset allocations is whether we have reached the peak in markets yet. While a degree of complacency has crept in, my key message is to be prepared for volatility. Now is the time to be disciplined with your asset allocation and don’t panic by selling too early.

Here’s why.

 ● Interest rates. If investors are looking for yield, then equities are compelling. Equities are both mainstream and liquid. While I am an advocate of alternative assets, you must ensure you get the correct advice if you’re on a hunt for yield. I remain an advocate of ‘‘buying the dip’’ for quality liquid assets such as equities.

● Inflation. Market bears are pointing towards systemic – not transitory – inflation. Yes, the US inflation rate of 5.4 per cent is the fastest since 2008. But if you look below the data, factors like the increase in airfares or second-hand motor vehicles have a lot to do with these figures.

Remove these levers and inflation looks to be more in line with rates of the past decade. Pandemic employment subsidies are still being paid in the US at the rate of $US300 per week. These will end at the end of August, and as a result, labour will re-enter the market. When this happens, upward pressure on labour or wage price inflation should also subside. Put these two elements together and I believe inflation is more transitory than systemic.

● The progress of the pandemic: I have argued before that inflation has overtaken the pandemic as the core issue in the market debate.

This is the case in most developed markets where a large percentage of the population is vaccinated and they are learning to live with the virus without the need for lockdowns. In Australia we remain dominated by rolling lockdowns with a sharp focus on how these will impact our own domestic economy.

Economic damage is caused by measures to curtail the spread of the virus rather than by the virus itself – in other words, by lockdowns. If vaccine levels do stall, I believe the downside will be limited. That’s because central banks and governments will remain proactive in providing stimulus. When vaccinations are widely rolled out and we’re living with the virus with no lockdowns, GDP will rise to pre-Covid levels and support a more bullish macro-economic environment.

So, if both growth and inflation have peaked, as I suggest they have, where are we in the cycle?

I would argue we have just entered mid cycle.

Having said that, I have been and remain concerned over complacency and expectations. A retreat could well occur; however, this does not mean the end of the larger cycle.

Some segments of equity markets do appear overvalued but equities nevertheless represent clear value over fixed income, especially on a yield perspective. In the 146 year history of the ASX, the market has risen 80.1 per cent of the time. Once in five years, on average, the market declines. As one pundit noted recently: ‘‘Volatility is the price you pay for a seat at the table.”

Buy the dip would be how I play this – not selling ahead of the dip, fearing we are at the end of this cycle.

Will Hamilton is the managing partner of Hamilton Wealth Partners, a Melbourne wealth manager.

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