It’s darkest just before the dawn
It's just one piece of bad news after another for markets at the moment. Falling stocks of oil in the US and the Arab-Israel nightmare are keeping oil prices well above Opec's stated target of $28 per barrel. Major US corporations announce each day earnings results that disappoint investors. The dot com and hi-tech sector takes a huge pounding.
To cap it all, the latest US inflation Figures show a disturbing pick-up. And that's what will really frighten markets: a combination of slowing economic growth in the US, worse-than-expected corporate profits and rising inflation.
But I remain optimistic. I reckon we are reaching the final bout of selling in equity markets. Why do I come to that conclusion? There are three possible scenarios on inflation. Sure, if inflation worms its way into final prices, including capital and labour, we shall have a bear market.
Then all the sensible investor should want to own is cash.
But if cost increases are absorbed by a shift in relative prices, but not through a rise in general inflation, things would be better for investors. profits would suffer as input prices rose, but output prices didn't.