It was a positive week for the S&P/ASX 200 (ASX: XJO) and US stock markets, with the ASX 200 finishing 0.7% higher and all three US benchmarks posting more than 1% gains.
Here are my key investor takeaways from the week.
Raising rates
The financial media remains obsessed with the threat of inflation and the near certainty that is higher interest rates. And they may well be right at some point in the next decade.
The concept of ‘transitory’ vs. ‘persistent’ inflation is being discussed with vigour yet most continue to ignore the fact that we are exiting a near two-year pandemic.
The pandemic shutdown and effectively broke supply chains for an extended period so expecting they would not be an issue when life returned to normal is clearly naïve.
What happens next is anyone’s guess, but as supply and demand rebalances, we may well head back to the deflationary environment we had before. In this environment, the early raises of rates would hurt the prospect of recovery.
Tesla, Netflix and the power of earnings
When investing in equities, earnings are ultimately the driver of shareholder returns, not income. If a company is consistently growing earnings over time, it will be worth more over time.
The US quarterly reporting season is reiterating this, with some 85% of the 70 odd companies that have reported thus far easily exceeding even heightened expectations.
Importantly, just relying on those companies whose earnings benefit from a cyclical increase in the price of the goods they sell simply won’t deliver sustained returns. But those providing services or building customer loyalty clearly will.
Both Tesla (NASDAQ: TSLA) and Netflix (NASDAQ: NFLX) proved this and reiterated the importance of having global equity exposure within portfolios.
Tesla delivered record profits and overcame a chip shortage to expand vehicle deliveries, whilst Netflix saw some 150 million customers watch Squid Game and another 4 million sign up to its platform.
