WeeklyWatch – US inflation erodes market confidence

16 November 2021

Stock Take

The grip of inflation

Market growth was hampered last week, as ongoing US inflation began to erode market confidence.

Last week, US government figures disclosed that headline inflation hit 6.2% – the highest rate in 30 years.

The high rate of inflation can be put down to a number of factors – namely, increasing energy costs, stretched supply chains not yet fully recovered from the pandemic, and increasing salaries due to worker shortages, for instance.

The Federal Reserve has asserted that the driving forces behind this high inflation are but transitory and should gradually diminish as the world recovers from the COVID-19 outbreak and supply catches up with demand. That said, pressure is mounting on the US political structure to take action, and on Wednesday President Joe Biden admitted as much, stating: “Inflation hurts Americans’ pocketbooks, and reversing this trend is a top priority for me.”

A fortnight ago, the Federal Reserve started to cut back its economic support measures implemented during the pandemic, but kept interest rates unchanged.

BlueBay’s Mark Dowding cautioned against assumptions that higher inflation is necessarily a temporary anomaly.

He commented:

“Bluntly speaking, if policymakers fail to act and are left asleep at the wheel, there is a growing risk that inflation will only trend higher. We now think that US CPI could approach 8% early in 2022 with core prices well above 6%. It is hard to know when the Fed may blink.”

Despite the fact that both the S&P 500 and the Nasdaq fell this week, the fall was progressive over the five-day period, rather than an abrupt drop when high inflation was reported.

It is also of note that this occurred following several weeks of strong growth, with both coming from record highs.

In and amongst rising inflation rates and increasing uncertainty around when US policymakers may start to raise central rates, this all serves as a reminder to diversify investment portfolios. Different asset classes from different geographies can help moderate some of the risks linked to higher inflation or increasing interest rates.

UK highs and lows

The FTSE 100 experienced a positive week in light of its recent and continued recovery. It remains below its pre-pandemic levels, yet it finished Thursday at the highest point since the pandemic first broke out, before then falling on Friday. Overall, it’s approaching an index score not witnessed since February 2020. Mining companies performed remarkably well as a sector, with rising commodity prices helping to drive up their share prices.

However, the UK market still has its fair share of challenges – a Reuters poll of economists revealed that the majority believe the Bank of England will raise interest rates in its December Monetary Policy Committee meeting, for example – thereby impacting equity prices.

Ruth Gregory, Senior UK Economist at Capital Economics, also pointed out that increasing trade tension could potentially pose a threat to the UK’s ongoing recovery. The past week has seen an intensified war of words between the UK and EU over French fishing rights and notably the Northern Ireland Protocol, with Lord Frost, the UK’s Chief Negotiator with the EU, threatening to invoke Article 16 of the Withdrawal Agreement if insufficient progress is made regarding ongoing negotiations. Article 16 permits either side to enforce unilateral “safeguarding measures” if the protocol leads to “serious economic, societal or environmental difficulties that are liable to persist”, or to “diversion of trade”.

The consequences could, however, embitter relations between the UK and the EU, and Gregory remarked that this quandary is having a negative impact on the UK economy:

“With speculation rising that the UK will trigger Article 16 of the Northern Ireland Protocol, the big risk is that relations between the UK and the EU sour to such an extent that parts of the whole UK–EU Brexit deal unravel. Even if things do not deteriorate that far, the cloud of Brexit uncertainty adds to our concerns that, amidst continued shortages and the drag on real incomes from high utility prices, GDP growth will be sluggish over the next six to nine months.”

Over in Europe, meanwhile, the STOXX Europe 600 continued to make headway into record territory. The EU is up against similar inflationary pressures as the UK and US; however, recent strong earnings results have helped boost the market to new highs over recent weeks.

Wealth Check 

Amidst the many headlines about COP26 over the last two weeks, it may have escaped your attention that last week was Talk Money Week. This initiative is essentially about getting people to talk about their finances and financial well-being.

Regardless of whether you’ve just started work or are nearing retirement, planning for the future begins with understanding what you have saved and whether it’s working in the best way possible for you. Without a doubt, this can be complex when you’ve accumulated a number of different pension pots over your working life, which is why we’ve formulated a handy guide to the different types of pensions.

But there’s more to retirement planning than just pensions. ISAs, for example, can prove to be a valuable shield from tax in retirement too, and the income they provide can work well in parallel with pensions.

And when you’re pondering your income, remember to consider the impact of inflation.

Your financial adviser is likewise there to assist you – they can help you work through any deep-rooted problems or queries you may have, such as whether you should access your pension now or wait, for example.

Not only that, but they can help you understand the role that assets such as property can play in your wider investment portfolio too.

They’re also well placed to help you manage your retirement priorities, which will naturally change over time – as indeed will your attitude to investment.

It may be that you find it difficult to think beyond life after work – and if so, you’re not alone – but it can pay to get in the habit. Familiarise yourself with the science behind visualisation, as it really could help you achieve your long-term retirement goals.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

The Last Word

“The pandemic has been calling the shots for the economy and for inflation. And if we want to get inflation down, I think continuing to make progress against the pandemic is the most important thing we can do.”

– US Treasury Secretary Janet Yellen argues that controlling COVID-19 is key to reining in inflation.

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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