Wellesley WeeklyWatch – The ups and downs of a week on Wall Street

09 March 2021

Stock Take

Market see-saw

On Friday, US stocks took a turn for the better following an erratic week where tech shares dropped once again. For the third week in a row, the tech-heavy Nasdaq index was down, while the S&P 500 index of large US companies was up for the week.

Markets are weighing up what the global economy will look like once the dangers of the pandemic have subsided, and so the performance of many technology shares has been below par the past few weeks. The general feeling seems to be that economies will quickly recover – the knock-on effect being that of potentially higher inflation. This theory was further supported last week following the news that the US economy exceeded job creation expectations in February.

The promise of strong economic growth on the horizon has meant that so-called ‘value’ stocks are more desirable compared to their fast-growing equivalents. Some investors believe that ‘value’ investments are about to have their moment, after many years where the likes of Tesla and other high-growth companies have hogged all the attention.

Yielding goodness?

Market movements in particular are linked to how inflation expectations have pushed up the yield of US Treasury bonds recently. Treasury bonds (US government debt) have a ripple effect on the prices of several kinds of financial assets. As Treasury yields increase, so does the interest that investors earn for owning them – this subsequently puts pressure on the prices of other investment types, such as equities.

In contrast with their age-old standards, yields are still very low – this week’s headlines focused on an increase to over 1.5% on the 10-year Treasury note, whereas two years ago it was at 2.6%, and around 5% 20 years ago. Yet the rate of increase appears to have thrown some investors this year.

Despite the recent pullback in certain parts of the market, major US stocks remain near the all-time highs that they achieved earlier in the year. However, investors seemed to be waiting for a signal from the Federal Reserve that it will continue to support asset prices.

Keeping interest rates low and buying bonds are just two of the ways that the central bank has done this over the past 12 months. Fed chair Jerome Powell said it would continue to support markets in his speech on Thursday, but investors appear to have been expecting a firmer commitment, because Treasury yields continued to rise after Powell finished his speech.

Since the coronavirus unleashed itself in 2020, bond yields and interest rates have been lying low, whereas other parts of the market, such as technology shares, have seen valuations shoot up. Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, believes that the recent changes could be part of a self-corrective pattern.

“It makes sense for markets to be held in some suspended animation after a period where we have witnessed some pretty substantial moves. However, this won’t last forever and, ultimately, underlying fundamentals will come to the fore,” Dowding added.

Fiscal fix-it

In the UK, meanwhile, the financial highlight of the week was the Budget announcement (see Wealth Check, below). Chancellor Rishi Sunak declared a ‘spend now, tax later’ set of proposals, in which he presented how the UK will embark on its journey to build up its public finances once the worst effects of the pandemic have bid a hasty retreat.

According to Nick Purves from RWC, which manages funds for St. James’s Place, the ’tax later’ part of these proposals means that the UK market will have a period of recovery, with anticipated benefits for stocks that are most sensitive to the health of the economy.

“As far as the UK market goes, this will continue to support the reflationary narrative which began in November and has seen the share prices of cyclical stocks such as energy, materials and financials rise significantly more than defensive sectors such as consumer staples and technology,” he added.

Azad Zangana, Senior European Economist & Strategist at Schroders, a fund manager for St. James’s Place, suggests that the news is potentially somewhat negative for the prospect of UK equities; however, this should be seen in the context of how undervalued they are currently.

“Purely on the back of the tax increases, the Budget would lead to a bit of a downgrade to the outlook for UK equities. But UK equities are relatively cheap now, relative to their own history and to the other markets. Looking at standard measurements of value, the UK market is still looking quite attractive,” he added.

Rory Bateman, Head of Equities at Schroders, concurred that the way forward is optimistic for UK companies following a tricky period.

“We should recognise that British companies have faced unprecedented difficulties over the last year, and we continue to see excellent opportunities for investment. Increased activity in the IPO market and companies coming to market for equity capital is a sign of confidence about the future growth prospects ahead.”

Wealth Check

As the finance arena realigns following last week’s Budget announcement, the effect of Sunak’s ‘spend now, tax later’ plan finds greater meaning. Taxes will reach their highest levels in many decades, businesses will grimace and bear most of the increase through the hike in Corporation Tax and, from 2022, individuals and families will also see increased tax burdens as the freeze on various tax allowances and exemptions takes place.

Many people will anticipate that the Chancellor could perform a U-turn with some of the planned tax rises if the economy bounces back stronger than expected – especially those Conservative MPs hoping for re-election.

For now, though, Sunak’s plans serve as an important reminder to take full advantage of the available allowances, exemptions and thresholds.

“Couples need to think of their finances as a unit instead of individually, and make use of both partners’ allowances,” suggests Eddie Grant, tax specialist at St. James’s Place. “Families need to pool their resources together to get the maximum value out of their wealth.”

This strategy ought to include taking any opportunities into account to invest tax-efficiently for children, be that by investing in a Junior ISA or a child’s pension. The Junior ISA annual allowance more than doubled to £9,000 last April, providing a simple yet significant way to potentially create funds for the future financial challenges children will face. Yet in 2018/19, three quarters of Junior ISA subscriptions went into cash1, undermining the long-term potential of investing through such a tax-efficient wrapper.

In these uncertain times, our children’s long-term financial future might not feel like it needs prioritising. However, the pandemic has undoubtedly brought home the consequences of failing to plan, either collectively or as individuals and families. Taking the time to invest now could be worth its weight in gold for our children in the decades ahead.

Sources:

1 HMRC, Individual Savings Account (ISA) Statistics, June 2020

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

In the Picture

One of the main aims of last week’s Budget was to rebuild public finances. A critical move for individuals is the predicted freezing of the main allowances, thresholds and exemptions for Income Tax, Capital Gains Tax and Inheritance Tax until April 2026.

The Last Word

“We can all choose to challenge and call out gender bias and inequality. We can all choose to seek out and celebrate women’s achievements. Collectively, we can all help create an inclusive world. From challenge comes change, so let’s all choose to challenge.”

– The organisers of this year’s International Women’s Day.

The information contained is correct as at the date of the article.

BlueBay, RWC and Schroders are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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