11 May 2021
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.
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.