WeeklyWatch – Market slump as the Fed plans to withdraw support

25 January 2022

Stock Take

Taking stock

Global equities experienced one of their worst weeks in the past year last week. The FTSE All World index fell over 4% during the week, meaning it witnessed its sharpest weekly drop since 2020.

Stocks of US companies have struggled so far in 2022, as markets assess the likelihood that the Federal Reserve will hike interest rates more swiftly than anticipated, so as to tackle rising inflation. Actions by the Fed and other central banks have kept asset prices buoyant throughout the pandemic, and the withdrawal of their support in the future is impacting on markets.

The Federal Reserve’s plans are in line with other major central banks. In December 2021, the Bank of England raised interest rates from 0.1% to 0.25%, while the European Central Bank announced it would taper its own bond-buying programme as inflation increased across the continent.

Tech troubles

Markets continued responding to the Federal Reserve’s projected plans last week, with the tech-heavy Nasdaq Composite dropping more than 7% by the close of the week. The S&P 500 Index of large US companies dropped marginally less, at almost 6%.

Technology has been one of the sectors that has felt the brunt of the recent drop the most. On Thursday, streaming giant Netflix gave investors an update, disclosing that its Q1 growth in new subscribers would be lower than expected. Not only that, but its shares dropped more than 22% on Friday.

Oliver Allen, an economist at Capital Economics, wrote that markets are having a negative response to indications that the Federal Reserve will raise interest rates more quickly than anticipated due to the fact that the central bank has previously supported markets.

He wrote:

“With inflation eye-wateringly high, the Fed is on course to steadily remove the ultra-accommodative monetary policy that has been a key prop to stock prices for over a decade now. Admittedly, other big declines in stock prices in recent years – such as the sharp sell-off in late 2018 and the meltdown in spring 2020 – arguably saw the Fed come to the rescue.”

He added:

“Even so, while acknowledging the downside risks, we forecast that the S&P 500 will continue to make moderate gains in the coming years. Despite the high valuations in some parts of the US equity market, we remain of the view that the valuation of the S&P 500 overall is not alarmingly high when compared to the very low ex-post real yields of US Treasuries.”

Naturally, the best possible way of dealing with ever-changing investment conditions is to take a long-term approach, with a well-balanced range of investments. The idea behind this is that if your funds are invested in different assets, their performance won’t depend on any one outcome.

Life on the edge

Meanwhile, in the UK last week, new data materialised revealing that the cost of living is becoming remarkably higher for most households. The Office for National Statistics (ONS) reported that two-thirds of UK households believe that it has gone up. According to the data, the main reasons for the increase were higher food prices, plus fuel and energy bills.

Wealth Check

The State Pension age, which is currently 66 for both men and women, was introduced in 1948. While much has changed since then, it continues to shape the way we approach retirement.

The nature of work, life expectancy, lifestyles and healthcare have changed beyond recognition since that time, plus the default retirement age was scrapped in 2011. What’s more, changes to pension rules in 2015 gave people much more freedom when it came to accessing and using their pension savings. However, for many people, the State Pension age nevertheless dictates how they think about and plan for retirement.

Of course, it can be useful to have a target. Yet the idea of reaching a specific age and immediately entering full retirement is outdated and often unhelpful, says Tony Clark, Senior Propositions Manager at St. James’s Place.

“We’re trying to move away from that idea of retiring at a certain age, and towards a point where it’s about when you feel ready to make some changes.”

Would you like to take control of your retirement – whether it’s a few decades away or more imminent? If so, the first step is to develop an idea of what you want. Nowadays, retirement might be about stopping work as soon as you’re able to or reducing your hours and continuing in some form of work for as long as you can.

It might be that you have post-retirement goals to aim for, a specific amount of money you want to pass on to your family or a new venture to start. You might simply want the peace of mind you’ll be financially comfortable during retirement, no matter what age you finish work.

The notion of gradually moving into retirement is all the more common nowadays. More people are reducing their reliance on earnings over time and are instead making a move towards drawing on their pension assets. This might take place over a year or over several years, Tony points out.

“We already see it now and it will become a normal approach to retirement. The value of advice is in helping you imagine what later life might look like, identifying the potential or the opportunities and pulling it all together in a plan that can then be put in place.”

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 Last Word

“Even as policymakers continue to address rising prices, our economic recovery will face significant risks until we have moved more decisively past the pandemic.”

– US Treasury Secretary Janet Yellen says that the COVID-19 pandemic remains the most pressing economic challenge.

 

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

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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