WeeklyWatch – Equities rally as US starts to hike rates

22 March 2022

Stock Take

Positive movements

Worldwide equity markets witnessed a notable growth last week, given the cautious optimism that a peace deal might be struck between Ukraine and Russia. Gains were broad-based across most key indices.

French and German bourses rose in tandem with both the CAC40 and DAX – ending the week +5.8% higher – and in Japan, the Nikkei 225 added +6.6%, helped by the Bank of Japan’s (BoJ) monetary policy meeting, which reiterated its diplomatic outlook.

US stocks overthrew a two-week losing streak, as the S&P500 rose by +6.2%, with the tech sector spiking in particular.

Inflation projections

Last week also saw the Federal Reserve’s Federal Open Market Committee (FOMC) putting up interest rates for the first time since 2018. The 0.25% raise came amid sharp inflation, with the Fed now aware of pricing pressures beyond those linked to pandemic supply stoppages.

Furthermore, the FOMC lowered its growth predictions for 2022, while increasing inflation projections.

BlueBay’s Mark Dowding commented on the FOMC release:

“It would seem that a recession in the next 12-18 months remains very unlikely. We have thought that the Fed could raise rates at every upcoming policy meeting, mirroring the tightening cycle seen in 2004-6. Ultimately, we see rates needing to rise beyond the ‘neutral’ point (which the Fed estimates to be at around 2.5%), as we think that inflation will be more persistent than many currently project.”

Rising rates

The FTSE100 and FTSE250 in the UK rose by +3.5% and +4.7% respectively – the latter profiting from some strength in sterling versus the US Dollar.

The Bank of England’s (BoE) Monetary Policy Committee also increased the base interest rate from 0.50% to 0.75% – the first time that the Committee has raised the rate three meetings in a row since 1997.

As in the US, the BoE is set on tackling rising inflation, which is broadly anticipated to reach 8% in the months ahead. However, a number of factors may limit their freedom to continue hiking rates as far as they might otherwise wish.

George Brown, Economist at Invesco, shared that he expected two additional rate rises to 1.25% in the coming months before a pause:

“First, unless the Chancellor caves into pressure to loosen the purse strings in the Spring Statement, fiscal policy will tighten as pandemic-related spending is reined in and National Insurance contributions are hiked. Second, while much depends on how the conflict in Ukraine develops, higher energy costs will choke off consumer demand and weigh on growth. Third, inflation is set to fall sharply in 2023 as energy prices moderate from elevated levels.”

Indeed, both the UK and the US have increased interest rates, yet they both remain markedly below the rate of inflation, and the knock-on effect of negative real interest rates will be felt by those with larger amounts of cash held on deposit.

Martin W Hennecke, Head of Asia Investment Advisory and Communications at St. James’s Place, commented:

“The implications of significantly negative real interest rates for investors are clear, namely that holding too much cash runs the risk of substantial purchasing power erosion. I believe that this risk will linger for some time, if not increase further given that inflationary pressures have been building up well before the Russia-Ukraine crisis, as seen by producer prices (typically a leading inflation indicator) hovering at or above the 10% level in most countries.”

He continued:

“One of the main reasons for investing therefore, should be as a means of seeking protection form inflation over time.”

In light of the current intense economic sensitivity, many people will be keen to have sight of Wednesday’s Spring Statement, to be aware of whether the Chancellor will action anything to ease the increasing consumer burden – for instance, by reducing fuel duties or possibly delaying the imminent National Insurance Increase.

Wealth Check

The spending power of your money will reduce with each passing year as inflation rises. If you’re dependent on a Cash ISA, this might mean missing out on the potential to grow or even preserve the value of your savings.

How long have you had your Cash ISA?

It’s perfectly reasonable to hold cash if you’re likely to need it in the short term. But if you’re holding it over the long term, it’s likely to be eroded by inflation.

Do you even need a Cash ISA?

The Personal Savings Allowance permits basic- and higher-rate taxpayers to earn tax-free interest up to £1,000 and £500 respectively, from money held in cash accounts. Earning that much interest would necessitate a large deposit up front, so a Cash ISA might not be necessary.

How about a Stocks and Shares ISA?

To truly optimise the tax perks of ISAs, it’s often a good idea to invest in assets with the potential to grow your wealth and supply an income.

Investing in a Stocks & Shares ISA gives you far more potential to do so, as opposed to cash. What’s more, as with a Cash ISA, you won’t pay any Income or Capital Gains Tax on the gains within your pot.

It can feel overwhelming to increase your exposure to the stock market, but this is where advice can really come into its own. Discussing your short-, medium-, and long-term financial goals with your financial adviser can help you figure out how much you need to keep in cash and how much you can afford to invest in stocks and shares.

Before the end of the current tax year, strike up that conversation about how Stocks & Shares ISAs should have a more significant role in your financial planning.

The value of an ISA 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 you invested.

An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.

The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.

In The Picture

Monthly data from Jan 1970 to Feb 2022. Source: US Bureau of Labor Statistics, March 2022. Monthly rolling year-on-year CPI for All Urban Consumers (CPI-U).

Source: Federal Reserve, March 2022. Monthly effective Federal funds rate.

The Last Word

“Where we can make a difference, where I can make a difference, of course I will, and that has been my track record and it will continue to be how I conduct myself in this job.”

Rishi Sunak in a recent interview with Times Radio – this week’s Spring Statement will reveal the extent of the actions behind the Chancellor’s words.

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

Invesco and BlueBay are fund managers 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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