Goldilocks is a stark indication that investors must take action
America’s Goldilocks economy should act as an alarm call for global investors, I believe.
July’s U.S. jobs data was robust across the board, and June’s report was upwardly revised. As such, this discounts the threat of a U.S. recession in the near future.
In addition, it also suggests that inflation could become an issue in the short term. With the number of hours worked and wages increasing, wage inflation will have an impact on headline CPI inflation – which will cause some concern.
The Federal Reserve will be aware that although CPI entered at just 1 per cent year on year, additional wage hikes could result in the target level of 2 per cent being breached relatively quickly, should people expect higher wages as a matter of course. In that case, the Fed will subsequently raise interest rates so as to cool the labour market and economy, and side step exceeding their inflation markers.
Indeed, this latest jobs news implies that the U.S. is now at that point.
In my view, the U.S. has been in Goldilocks territory –i.e., growth and inflation have been not too hot, not too cold, but just right.
However, as forecast wage growth is now likely to rise, the Goldilocks economy could be reaching its end, as inflation becomes a serious worry, resulting in an increasingly likely rate hike.
As the Fed is, essentially, the world’s defacto central bank, increasing U.S. rates will,of course, have significant consequences for American and global investors.
Moreover, the threat of inflation will play right into the hands of certain Fed members who are focused on ‘normalizing’ interest rates, regardless of the outcome on the economy and financial markets.
As such, it is crucial that investors seek refuge from the probable turbulence as a result of the upcoming rate rise, by having a well-diversified portfolio across geographical regions, assets classes and sectors.
Indeed, a buy-and-hold strategy of quality multi-asset and multi-currency funds would be a suitable strategy.
Regardless, investors shouldn’t delay in taking action, in order to minimise risk and make the most of inevitable opportunities following a rate hike.