Wellesley WeeklyWatch – US stocks fly high despite feeble job data

11 May 2021

Stock Take

Back to life, back to reality

Last week was a mixed bag for investors in one of the world’s biggest stock indices. The S&P 500 Index of large US companies reached unparalleled highs, while investor enthusiasm was kept in check following a monthly release of unemployment numbers – a timely reminder of the continued economic damage brought about by the pandemic.

The figures told the story of a decline in job creation in the US last month, falling short of many analysts’ and economists’ expectations. Company payrolls saw approximately 266,000 new jobs in April – certainly positive news, but way off the projected million.

In spite of the employment gains over recent months, numbers showed that eight million fewer Americans worked last month in comparison to February 2020 – yet another wake-up call about the long road to recovery ahead.

Eyeballing interest rates

Subsequently, investors and forecasters were again looking at what the recent figures indicate regarding the health of the global economy following COVID-19, what they imply about the likelihood of higher inflation, and how the world’s government and central bank policies will need to react accordingly.

Last week, Janet Yellen, the US Secretary of the Treasury, made headlines due to comments she made at an event hosted by The Atlantic magazine.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.”

She tempered her remarks later on in the day, but the statement nevertheless appeared to rattle the audience’s nerves.

Ever since vaccine programmes started to gain momentum towards the end of 2020, investors have been attempting to weigh up whether the rate of expected economic recovery could give way to a phase of higher inflation. There are worries that it might ultimately cause governments and central banks to make policy changes, such as raising interest rates, which were lowered last year to help curtail the cost of borrowing and aid market recovery.

Higher interest rates could prove problematic to the share prices of the companies that have seen their valuations swell this past year. For instance, some large technology companies are trading at high valuations in proportion to their earnings. In part, this is down to the way that low interest rates inflate the share prices of fast-growing companies. Since November, the share prices of such companies have flopped compared to the share prices of those that were hardest hit by the outbreak last year.

On standby

Needless to say, investors are intently watching the signals from policymakers. On the other hand, while comments such as Janet Yellen’s last week do make headlines, they can also be seen as the right thing to do in ambiguous circumstances.

Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, believes that, rather than hiking up interest rates out of the blue, it’s far better to give an insight into the mindset of policymakers, so as to minimise disruption in the long-term.

“It can be viewed that Yellen is just laying the groundwork, so that the nation and financial markets are prepared for rates to rise as the economy bounces back and returns to full employment in the months to come,” he wrote.

When contemplating their investment strategy, fund managers prudently consider the future investing environment, including topics such as inflation and interest rates, as well as the fundamental prospects of the companies (or other investment types) in their fund. For example, funds can be adjusted so that they’re better prepared for the possibility of inflation making a comeback (see In the Picture).

What, therefore, is the best way of tackling uncertainty? Invest for the long-term with a well-diversified set of investments. The beauty of investing your funds across a wide range of assets is that their performance won’t be dictated by any one outcome.

Wealth Check

According to the Financial Services Compensation Scheme (FSCS), exceedingly low interest rates in the UK have caused retirees to contemplate making higher risk investments with a view to achieving better returns.1 The research also reveals that a mere 12% of retirees sought financial advice when investing in higher risk areas – leading some people to buy products without FSCS protection, which potentially jeopardises the security of their life savings.2

It’s customary for your pension fund to remain invested while you’re retired; however, it’s still important that the level of investment risk is diligently managed, and that’s where your financial adviser comes in. They can help you think about how your drawdown funds should be invested. Why? You’re effectively getting your pension fund to work a lot harder – to generate an income but at the same time maintain and grow your capital.

There are various things to consider within your drawdown plans – the kind of lifestyle you wish to lead in retirement, the income that you need to meet your goals, and how long you expect to live.

Danni Brotherston, Head of Advice Policy and Development at St. James’s Place, shares some advice:

“You really need an adviser at this point, because it can be complicated. Advisers play a big part in helping you understand what you need to know, the different types of risks, how these may change over time, and what can be done to mitigate them.”

There’s no right or wrong time to set the ball rolling and start up a conversation about your risk tolerance in retirement, so contact your Wellesley financial adviser today to gain a clearer understanding about your options.

Sources:

1,2 OnePoll on behalf of FSCS, 2000 retirees aged 55-75, February 2021

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

In the Picture

The past few months have seen much talk about whether inflation will put in another appearance as the global recovery gains momentum. But what does this mean for investors? Clyde Roussow, a fund manager for Ninety One, explains that carefully selecting the business you invest in can act as protection.

The Last Word

“Over the last 27 years, we have raised three incredible children and built a foundation that works all over the world to enable all people to lead healthy, productive lives. We continue to share a belief in that mission and will continue our work together at the foundation, but we no longer believe we can grow together as a couple in the next phase of our lives.”

Philanthropists Bill and Melinda Gates announcing the end of their marriage last week.

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

BlueBay is a fund manager 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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