America’s Goldilocks economy should be an alarm call for investors worldwide, warns the CEO of one of the world’s largest independent financial advisory organisations.
The warning from Nigel Green, chief executive and founder of deVere Group, which has $10bn under advice, follows the latest robust U.S. jobs report.
Mr Green observes: “July’s U.S. jobs data was strong across the board and June’s jobs report was upwardly revised. In effect, this rules out a recession threat in the near future.
“It also suggests that inflation could now become an issue in the near term. As hours worked and wages increase, wage inflation will impact headline CPI inflation – and this will be of concern.
“The Fed will be conscious that though CPI for July came in at just 1 per cent year on year, further wage increases could lead to the target level of 2 per cent being breached quite quickly if Americans come to expect higher wages as a matter of course. When this happens, the Fed will raise interest rates in order to cool the labour market and the economy in general, and avoid exceeding inflation targets.”
He continues: “This latest positive news on jobs hints that America is now at that point.
“It can be reasonably argued that the U.S. has been in Goldilocks territory – that’s to say when the economy sustains moderate growth with Fed members sitting on the fence over future policy direction – in other words, growth and inflation have been not too hot and not too cold, but just about right.
“But with wage growth expectation now likely to pick up, the Goldilocks scenario now looks to be coming to an end with inflation becoming a real concern, meaning a rate hike is increasingly likely.”
Mr Green goes on to say: “With the Fed being the world’s defacto central bank, a raising of U.S. rates will have important ramifications for investors not only in the U.S., but the world over.
“Furthermore, inflation fears will play into the hands of some Fed members who are determined to ‘normalize’ interest rates, irrespective of the effect on the economy and financial markets.”
He adds: “Investors should be seeking a safe haven from the likely turbulence caused by a forthcoming rate hike by having an appropriately balanced portfolio. This includes adequate diversification across asset classes, sectors and regions.
“A buy-and-hold strategy of quality multi-asset and multi-currency funds is a valid strategy.”
The deVere CEO concludes: “Investors should act sooner rather than later to mitigate the risks and maximise the important opportunities of a Fed interest rate hike.”