WeeklyWatch – UK inflation reaches 9%, and market instability persists

24 May 2022

Stock Take

Inflationary volatility

Equity markets experienced ongoing instability last week, as economies continued to battle with inflation.

In the UK, the Office for National Statistics (ONS) disclosed that CPI Inflation soared by 9.0% in the 12 months leading up to April 2022 – the highest rate recorded in four decades.

The Bank of England (BoE) has forewarned that inflation is set to continue to rise in the near-term – possibly even breaking 10% this year.

The FTSE 100 has counted among the most resilient markets so far this year, yet it declined by -0.4% over the course of the week.

Oliver Wayne, Senior Vice President – Manager Research, at investment consultancy Redington, detailed why high inflation can be problematic for equities:

“Inflation presents challenges for companies. It impacts their sales, margins and the multiple they trade on. It erodes consumers purchasing power, which reduces their ability to spend, which impacts company sales. It increases costs which reduces margins.”

Wayne states that the current environment will potentially witness a different style of shares perform better:

“In low-inflation environments, value style investing has underperformed the market, which is what we have experienced over the last decade. However, in high-inflation environments, defined as over 4.4%, it has meaningfully outperformed the market. This shouldn’t surprise us because these value companies are by definition lower duration investments where you own more levels of cash, earnings and assets for every pound invested.”

This scenario serves as a useful reminder of how crucial it is to diversify – those keenly focused on one style of investing might fare well in certain circumstances, but could otherwise find themselves in difficulty once the market changes. An individual heavily invested in tech stocks will no doubt have had a difficult year, with the likes of Apple, Alphabet, Microsoft and Tesla all down over 20% year-to-date. This is precisely why we look to invest in a range of shares and asset classes, to help balance out some of this instability.

It is also an important reminder of how valuable active managers are, as they can identify such trends, and invest accordingly.

US retreat

In the US, a dismal economic outlook saw equity markets retreat once more last week. The S&P 500 dropped by -3.1% after Federal Reserve Chairman Jerome Powell shared that the Bank is ready to take action, if needed, to tackle inflation. The S&P 500 has now slumped for seven consecutive weeks – its worst run since 2001.

This comprised a 4% drop on Wednesday – its largest one-day drop since the pandemic broke out in March 2020, as large traditional retailers Target and Walmart both fell after posting discouraging results.

Unemployment data released towards the end of the week only added fuel to the fire, in that it revealed 218,000 initial jobless claims – nearly 20,000 above expectations. The ensuing concern was that the US might experience a recession this year.

Investment see-saw

Since the beginning of 2022, both the S&P 500 and NASDAQ have been markedly down. Investors may well be fearful about this short-term volatility, yet it’s important to remember that ups and downs are part and parcel.

Adrian Frost, from Artemis, notes:

“Since 1957, a five-month decline of over 15% in the S&P has led to a median return a year later of +20% (though not in 2001 and 2008).”

Indeed, past performance isn’t necessarily significant in terms of future performance. However, this statistic rightly demonstrates that, while the notion of leaving the market during tough times might be appealing, periods of heightened instability are but temporary, and exiting the market could mean missing out on any bounce effect at the end of it.

Dan O’Keefe, Lead Portfolio Manager at Artisan, observes:

“We have the tendency to look into the market at times of extreme volatility and feel that things are highly uncertain. But they’re equally uncertain at any point in time, and equally as unknowable as any other point in time. When the market is volatile, and stocks are going down, it’s an unpleasant experience.

“But in my 25 years of investing, one thing just continues to ring true, and that is when things feel very bad and unpleasant, it’s usually the right time to be allocating capital. And that’s usually when the greatest returns (prospectively), will be earned. And it’s not easy to do, but it requires discipline. And I think that’s a lesson that everyone needs to keep in the forefront of their minds in times like this.”

Wealth Check

We’ve all had our fair share of reminders in recent years that the unexpected can thwart our plans at any given moment.

The knock-on effect of COVID-19 is still evident, even though the threat is gradually receding – not to mention the fact that the effects of the war in Ukraine and the biggest cost-of-living crisis in decades are causing yet more distress and disruption.

Rapidly rising fuel, energy and food prices have driven levels of inflation up significantly.

Let’s not forget that we also have to tackle the financial effects of unexpected events closer to home too, such as illness, accidents, bereavement and unemployment. It only takes one unfortunate turn of events to throw the most carefully laid plans, including the savings and investments being built up for the future.

Tricky choices

There are different ways of protecting household finances, whether that’s raiding emergency savings, cutting expenditure or considering insurance products such as income protection.

Yet during testing times, it can be all too easy to make knee-jerk decisions that might not be for the best in the long-term. That risk is intensified by the anxiety and fear around the financial outlook in many households, and the emotional challenges brought on by life-changing events such as illness and bereavement.

Tony Clark, Senior Propositions Manager at St. James’s Place, observes:

“It could be family situations, such as the financial impact of having to quit work or reduce your hours to care for a family member, for example.”

It could equally be a partner losing their job and the household therefore having to wholly rely on one income. “One thing that often catches people out is what happens if they can’t work,” says Tony.

Is it worth getting income protection insurance or critical illness insurance?

They’re both important, but they offer different types of protection. Income protection policies provide payouts to help cover outgoings such as mortgage repayments, rent and bills in the event of being unable to work because of illness or an accident. They’ll cover you for a certain amount of time (typically until you retire), and you’ll be paid until you’re either in the position to return to work or you reach the end of the term.

As for critical illness insurance policies, they can be complementary, as they provide a lump sum on the diagnosis of certain critical illnesses or medical conditions. This can prove to be a welcome financial boost should you be unable to work or decide you don’t want to.

Tony continues:

“People will immediately think of protecting themselves in terms of critical illnesses, but insuring your income that’s funding your savings and investments is particularly important.”

In The Picture

When stocks slump, you might feel drawn to hitting the sell button. However, it’s worth holding tight, as the market’s most buoyant days often follow the largest drops – therefore, selling can dramatically lower returns by causing you to miss the best days. In spite of the mixed emotions we might feel when investing during troubled times, the wisest thing is to stay invested and think in terms of decades, not days.

Source: Financial Express, Analytics. Stock market represented by the FTSE All Share Index. Data as at 31 December 2021.

Please be aware past performance is not indicative of future performance, and the value of your investment, as well as any income, may go down as well as up. You may get back less than you invested.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2022. FTSE Russell is a trading name of certain of the LSE Group companies. “FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

The Last Word

“The main driver of inflation and what brings it down is the very big, real income shock, which is coming from outside forces and, particularly, energy prices and global goods prices. That will have an impact on domestic demand, and it will dampen activity, and I’m afraid it looks like it will increase unemployment.”

– UK Bank of England Governor Andrew Bailey warns MPs things could become tougher before they get better.

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

Artemis and Artisan 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.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2022. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2022; all rights reserved.