What lower inflation means for stocks, bonds and gold

The monthly reports of the consumer Price index has become much less frightening in many places. Streams of heavy interest Interest rate hikes in the US, UK and Europe (among others) have caused red-hot inflation back towards the central banks' more dovish 2% target. And although politicians are quick to point out that the work is not quite done, it is clear that the situation has cooled considerably.

So it's worth taking a look at how this newer situation of lower inflation might affect your portfolio and how likely it is to persist.

Can stocks continue their upward trend?

Corporate stocks have seemed more volatile this month than they have in a long time. And that is largely because some recent signs of a slowdown in the US economy have people worried about a possible recessionA series of less spectacular quarterly reports from the glittering tech giants has not exactly helped matters. Nervous investors have Shares and pocket the profits made as a precaution.

But despite the recent plunge – the S&P 500 lost about 5 percent in a week – the outlook for stocks is generally considered quite rosy in an environment of low interest rates and low inflation. Moreover, a “drop” of 5 percent or more is not all that unusual, says Bank of America. Its research shows that there have been an average of three such declines per year since the 1930s.

The fact is that falling inflation and falling interest rates should boost economic growth – all else being equal – and that's good news for corporate profits. Plus, stock valuations tend to rise when interest rates fall because the returns on cash-like assets fall, making the stock market more attractive.

It is therefore possible that investors are simply too pessimistic. At least that is what Invesco suspects: According to the fund manager, a recession is not to be expected immediately, especially when you look at the US labor market, which still appears to be in excellent health.

The fund company expects share prices to remain volatile for a while and says this could be a lucky break. The small sell-offs over time could provide some good buying opportunities for any patient investors who have kept a little cash on the side.

Are bonds ready for a comeback?

The binding The market is once again proving its value as a diversification tool while also providing investors with a valuable source of income.

Of course, bond prices are very sensitive to interest rates, and the recent period of rising interest rates generally resulted in declines in value, causing yields to match market rates. (Remember, bond prices fall when yields rise, and vice versa.) That's why bonds have fallen so much in 2022—investors have had to reprice existing securities because new bonds were issued with higher interest rates.

Bond prices have been rising recently on concerns about a slowdown and expectations that central banks will be forced to cut interest rates to keep their economies and labor markets afloat. Now that inflation is back near target, they have more freedom to do so, with less fear that it will stoke inflation again.

This suggests that this could be a good time for safe government bonds from countries such as the US, UK or Europe.

But it could also be a good time for short-dated corporate bonds. Fund manager Fidelity International says that with their yield advantage over government bonds, they are the best choice for the bond market. This is because the short end of the curve is more affected by interest rate changes than the longer end. And when central banks start cutting interest rates, they tend to see a greater positive effect.

Could gold be ready to shine?

It is quite possible that the glittering metal and the companies that mine it are generally thrilled by falling interest rates.

Gold has been in high demand recently as central banks around the world are buying up gold en masse to diversify their huge reserves away from the US dollar. In addition, interest rates in America are about to fall, which is generally positive for the price of gold. Gold miners are also likely to benefit, especially as their operations become more profitable as the price of the metal rises.

Asset manager Charteris expects the price of gold to rise from around $2,400 currently to over $3,000 per ounce in the next six to twelve months. The company believes that a rise in global debt or geopolitical risks could accelerate the trend towards the safe metal.

And finally: has high inflation really been defeated?

Well, consumer price increases were officially below 3% in the US, Europe and the UK in July – generally approaching central banks' standard target of 2%. Still, some experts warn that inflation could continue to rise somewhat in the world's economies. Volatility from now on.

Part of the problem lies in the ever-growing national debt in many places and the fact that politicians seem to believe in a “magic money tree,” says British asset manager Ruffer. For this reason, government bonds are no longer the safe haven they once were, the company says.

The solution is to buy inflation-linked and short-term bonds and avoid most stocks. In fact, the mutual fund that is the fund's flagship asset holds about 33 percent of its assets in short-term bonds and about 20 percent in inflation-linked bonds. About 11 percent of the portfolio is in UK stocks, which are cheaper than their global counterparts.

The company believes that there are simply no more positive surprises in the bull market for stocks and that this could lead to a dangerous situation at such high valuations.