07 June 2022
Echoes of instability
UK businesses and markets closed for two days to mark Queen Elizabeth’s Platinum Jubilee at the end of last week, meaning many people enjoyed a shorter working week.
Duncan Lamont, Head of Strategic Research at Schroders, considered the development of the economy during the Queen’s 70-year reign – which did, in fact, start a whole decade before the FTSE All Share Index was even initiated.
He said that, in 1952, the main stock market index of the day was the FT 30, which was led by textile companies, shipbuilders and carmakers.
“In June 1952, the Bank of England’s key Bank Rate was at 4%. Inflation stood at 10.5%. This was one of the few periods in the last 70 years when – as now – inflation spiked sharply, rising significantly above the Bank Rate. Today the Bank Rate is 1%, and inflation (CPI) just under 9%.”
Lamont likewise draws our attention to the 1970s as a somewhat extreme example of instability. In 1973 and 1974, markets dropped by 28% and 50%, respectively. In 1975, the market made a comeback, posting 149% returns. Despite the fact that this was insufficient to completely make up for the losses witnessed during the previous two years, those who sold at the end of 1974 would have probably been worse off than anyone who stuck it out.
This scenario highlights how critical is it is to remain calm during volatile times. Over the long term, markets generally rise – and selling when they’re down means crystallising these losses, and possibly missing out on any recovery.
While today’s market isn’t currently anywhere near as unstable as that of the mid-1970s, it is, nonetheless, finding rising inflation and geopolitical issues problematic.
Persistent volatility in the US
Parallels can be drawn between the UK and US markets – the latter of which also continues to face volatility. A fortnight ago, the market managed to post some positive returns, yet it reverted to negative territory last week. This could, in part, be attributed to the release of May’s job data, which was lower than that of April. Investors are furtively watching the jobs market, as any indication that it might be getting too tight or ‘hot’ could magnify existing inflationary pressures.
Kristina Hooper, Chief Global Market Strategist at Invesco, believes that instability will persist for the time-being. Even though the market may move lower in the weeks to come, she believes it will bottom out at some point in the coming months, and that a strong, sustainable rally could follow.
“That means it’s time to begin taking advantage of opportunities, which I believe are abundant. I wrote about tech stocks last week. Another area where I see opportunity is Chinese stocks, where sentiment is very negative and valuations are very attractive, in my view. In addition, I anticipate continued monetary policy accommodation and strong fiscal stimulus.”
Over in Europe, the Eurozone released its inflation data last week, which reached 8.1% – up from 7.4% in April, and well above consensus expectations of 7.1%.
Andrew Kenningham, Chief Europe Economist at Capital Economics, said:
“Members of the European Central Bank (ECB) Governing Council are unanimous in believing that interest rates should be raised but divided over how quickly.
“We expect them to confirm next Thursday that the Bank will end net asset purchases in early July and raise the deposit rate out of negative territory by the end of September. The policy statement is also likely to leave the door open to a 50bp hike in July. We think surging inflation will ultimately prompt the ECB to raise interest rates more than the consensus and investors expect this year.”