08 June 2021
Easy does it
US and European stocks continued to rise last week, following a positive response from Wall Street to a US jobs report. The world’s largest economy added 560,000 jobs in May, which led to the Nasdaq Composite, a technology-heavy index of US companies, subsequently climbing 1.5% on Friday.
The jobs rise was higher than April’s figures, but lower than the consensus estimate – helping to quell fears that the economy is expanding too rapidly. While it might appear contradictory that markets reacted well to reports that the growth of employment is slower than anticipated, it’s likely to inform how policymakers will behave over the months ahead.
Central banks across the globe have provided low interest rates and other forms of help during the coronavirus crisis to support asset prices. However, many are now in the position where they are poised to tighten up their policies if they see a prolonged period of high inflation. If the statistics indicate that economies are starting to overheat as restrictions are lifted, central bankers will have no option but to do a U-turn on their policies. This will help deal with rising inflation, but will probably have a negative effect on asset prices.
Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, wrote:
“Looking forward, debate among policymakers is slowly shifting towards how fast stimulus measures can be withdrawn as economies reopen and then to how different the post-Covid economy will be. Everyone, including central bankers, is watching the data for direction.”
Fund managers are intently assessing the data for tip-offs about the future, scrutinising reports such as May’s US payroll release, plus comments from central bank officials, to forecast the circumstances.
There are already a lot of data points signalling that inflation has taken an upturn over recent months, with commodity prices growing as the world economy recovers. Inflation is just one factor that fund managers take into consideration when investing your funds, to ensure that they keep meeting their goals in the future. They continually appraise the health of the companies they invest in, their growth prospects, plus business and political trends, together with the economic backdrop,.
The best way for investors to tackle uncertainty is by investing for the long term, with a well-balanced range of investments. The performance of funds invested in a wide range of assets is not reliant on one sole outcome.
“We take the view that growth and employment data in the US will remain solid and inflation will continue to surprise to the upside. We believe US rates will move higher in response, with a high probability that this will be disruptive to fixed income in general – and probably also to wider risk assets.”
Beware of the burn
European stocks also climbed last week, with the STOXX Europe 600 Index reaching a new high. UK stocks closed the week on a somewhat flat note; however, airline stocks were badly affected after the government’s sudden announcement that holidaymakers could no longer travel to Portugal without isolating on their return.
Richard Colwell of Columbia Threadneedle, Manager of the St. James’s Place Strategic Managed fund, added:
“The UK remains a rich hunting ground. It has rallied a long way in some areas, but we feel there is much further to go – not just because ‘value’ stocks have perked up or inflation might occur.”
Investors need to remain vigilant in light of the uncertainty, observes Mark Dowding. Despite the fact that vaccine rollout programmes mean that the pandemic has now been outmanoeuvred, investors cannot afford to rest on their laurels.
“With summer having arrived and markets in a sleepy holding mode for now, there’s a warning for anyone falling asleep in the sun: when things hot up, it’s easy to get burnt.”