2 June 2021
A knock to tech stocks
It’s the fourth consecutive month that US stocks have risen, after finishing May higher once again. The S&P 500 Index of large US companies was within reach of record levels, although technology stocks suffered as the technology-heavy Nasdaq index fell for the month.
Share prices differing between technology businesses and so-called ‘value’ stocks has been a market trend since the successful rollouts of vaccine programmes began last year – winners of the pandemic did well in terms of revenue and share prices through the lockdowns. However, it has been those who saw their share prices fall that have been more successful in recent months, with last week being no exception.
Oliver Allen, Markets Economist at Capital Economics wrote:
“We suspect that much of the pattern this month can be explained by optimism about the ‘big tech’ firms, and the IT sector more generally, falling back from a high level. The pandemic has arguably benefited many firms in this camp, at least in relative terms, given that it forced a lot of activity to migrate online, and led to a switch in consumption patterns away from services and towards goods, particularly electronics.”
“As the further progress of vaccination drives in many advanced economies has meant a return to normality now in sight, some optimism about tech may now be ebbing. We generally think that the rotation in stock markets has further to go over the next few years, as many of the factors which have worked in its favour since late last year resume.”
Riskier, more speculative investments also saw a renewal of interest towards the end of May – in particular, ‘meme stocks’, which have been favoured by amateur traders; some of these companies saw their share prices rise last week, one example being the struggling US cinema chain AMC Theatres who enjoyed a quick rise in share prices.
Investors’ eyes on inflation
Amongst all of this, markets kept their focus on inflation again last week. One of the most urgent questions on investor’s minds as economies around the world reopen is whether the higher inflation that has crept back into world economies is going to hang around. Early May data releases have already shown that it’s taking place. For example, in the UK, the Consumer Prices Index was 1.5% for the year to April, causing a public musing from the Bank of England about increasing interest rates. Last week, however, markets appeared more confident that central banks around the world won’t rush to raise rates.
Richard Colwell of Columbia Threadneedle, manager of the St. James’s Place Strategic Managed fund, wrote:
“With President Biden and the US pursuing a $1 trillion-plus spending plan, and central banks happy to let economies run hot, the spectre of inflation is rearing its head. There has been a rush to commodities and banks, a suggestion that we are returning to the ‘Roaring 20s’ when global growth was boosted by post-war sentiment. But what is not known is if this is temporary, skewed by unusual pandemic demand trends, or supply disruption causing short-term spikes.”
Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund, added:
“It seems, for now, the market narrative is one where inflation will be transitory – but for how long?”
Since the pandemic took hold last year, low interest rates along with other forms of support and stimulus from central banks have kept asset prices afloat. But if they see a sustained period of high inflation, most banks have signalled to markets that they will tighten up their policies. Meanwhile, fund managers are keeping a close eye on the data for clues about the future.
When investing your fund, inflation is just one of a number of things they might consider in order to ensure they are well positioned for the future. Of course, the best way to deal with uncertainty is to focus on long-term investment with a well-diversified portfolio. By investing in a wide range of assets, you won’t be relying on any one outcome in terms of performance.