WeeklyWatch – Infrastructure plans pave the way for US market growth

17 August 2021

Stock Take

Fill the bill

US markets experienced a buoyant week, hitting record highs – to a certain extent, this was attributed to a $1 trillion infrastructure bill progressing through the Senate.

The bill includes $65 billion to develop high-speed internet access, $110 billion for roads and bridges, and billions for air travel and rail. The bill passed with full Democrat support, as well as a notable number of Republican Senators – however, it may come up against obstacles progressing through the House of Representatives. There, Speaker Nancy Pelosi appears ready to stop the bill making its way through, unless the Senate passes an additional bill for $3.5 trillion to target social issues, such as climate change, healthcare and childcare.

Strong stats?

The S&P 500 and the Dow Jones Industrial Average rounded off Tuesday on new highs following the news. However, the Nasdaq, which is weighted towards technology shares, dropped during the same period.

This established the mood for most of the remainder of the week for the S&P 500 and Dow indices, and they both closed the week at record highs. The Nasdaq dipped over Tuesday and Wednesday, before making a comeback in the latter half of the week to finish marginally down.

Part of the problem for the Nasdaq was higher-than-anticipated inflation. Wednesday revealed that it had stayed put at 5.4% – on a par with last month – whereas it had been predicted to drop slightly. This has reignited questions over when the Federal Reserve might plan on raising interest rates and wind down some of its support measures that were implemented to battle the economic effects of COVID-19. With the meeting at Jackson Hole on the horizon, these questions may well gain traction in the weeks ahead.

Onwards and upwards

Elsewhere in the world, European shares continued on an upwards trajectory, maintaining their growth streak throughout the week to hit yet more record highs. The pan-European STOXX Europe 600 has witnessed its numbers surge following strong financial results from its members over recent weeks, as the continent comes through the worst of the pandemic. The advancement of vaccination efforts has also boosted sentiment on the continent.

Catch-up for the FTSE 100 has been slower than its EU and US counterparts in reaching pre-pandemic peaks. Nevertheless, it managed to perform comparably over last week on the strength of robust economic data. Figures released on Thursday revealed 4.8% GDP growth in Q2 2021, as the impact of the economy opening up started to be felt. While it remains below its pre-pandemic peak, it crossed the 7,200 score last week for the first time since March 2020.

Under pressure

As for developing markets, China continued to strengthen its regulatory hand over the economy thanks to a new five-year plan. Chinese tech stocks have borne the brunt of regulatory actions in recent weeks from the Chinese Communist Party, and the new forward-looking plan indicates these companies can expect this pressure to continue for some time yet. Falling tech stocks subsequently continued to hinder Chinese stock markets.

COVID-19 has been piling on political pressure in other developing countries too. James Syme and Paul Wimborne, Senior Fund Managers at J O Hambro Capital Management (Co-manager of the St. James’s Place Global Equity and Global Quality funds), observed that a number of populist leaders in the world have been tested by the virus:

“We see this at its most stark in Brazil, where opinion polling on the Bolsonaro presidency has largely tracked COVID case data. In Turkey, economic stress is elevated because of policy mistakes as well as the impact of COVID, but the effect in aggregate is that the governing AKP (and President Erdoğan) are closer to losing power than at any time since 2003.”

They added:

“Governments claiming to operate on a more technocratic basis (sometimes using this as an excuse for holding to weaker democratic values) have not been immune. In Malaysia, the governing Bersatu party have lost their coalition partner and are (at the time of writing) using the pandemic-driven suspension of parliament as a tool to cling to power.”

Compared to more developed nations, vaccination efforts are comparatively low in many emerging market countries, meaning it may be some time before the more long-term political and economic effects on these countries are visible.

Wealth Check

New activity in the UK housing market lagged in July, ending a four-month run of increases, according to the latest residential market survey from the Royal Institution of Chartered Surveyors (RICS).1

Despite the fact sales have dropped slightly, the value of UK properties has remained intact. House prices still increased last month – with almost 80% of the surveyed respondents reporting higher prices.2 RICS puts this growth down to a lack of supply.

The report’s writers say that the drop in new activity is partly due to the reintroduction of Stamp Duty on many homes. The sales tax was suspended by the government last year on homes up to £500,000 to keep the housing market afloat during the pandemic, but was reinstated on homes up to £250,000 in July. In October it will revert to £125,000.

Simon Rubinsohn, Chief Economist at RICS, noted:

“Although the tapering in Stamp Duty is beginning to have some impact on RICS activity indicators, the overall tone to the market remains firm, with the metrics capturing price expectations showing few signs of wavering.”

Paul Johnson, Head of Mortgages at St. James’s Place, notes that the high level of activity in the property market – in spite of the Stamp Duty renewal – has meant that St. James’s Place has seen its biggest month for mortgage completions in July for 15 years.

He adds:

“There is a definite lack of housing supply in certain areas of the country, which is seeing the return of gazumping. However, the key message is not to overcommit yourself when purchasing a property. Make sure you can comfortably manage the mortgage payments and take advice on the best mortgage for you.”

Your home may be repossessed if you do not keep up repayments on your mortgage.

Sources:

1, 2 RICS, UK Residential Market Survey July 2021 (264 responses from chartered surveyors)

 

The Last Word

“The requirement [to self-isolate] for double-jabbed, and under-18s who are contacts of people with COVID-19, has been removed as we cautiously take another step back towards normality.”

Health Secretary Sajid Javid announces a further loosening of COVID-19 restrictions in England and Northern Ireland.

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

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