WeeklyWatch – Markets bounce back despite growing recession fears

28 June 2022

Stock Take

Stock market recovery

Contradicting recent figures, markets took many by surprise and bounced back last week – with the US recording some of their strongest performance figures of the year – despite developing recession worries.

This year has seen many equity markets take the hit of rising inflation and interest rates, seeing the likes of the S&P 500 and NASDAQ drop much of their gains from the past two years. This has been especially true of technology ‘growth’ shares, and even huge names like Apple have seen large declines in their share price value.

The threat of inflation remained solid last week, as the UK’s Office for National Statistics revealed inflation grew to 9.1% in May, up from 9% the previous month. Meanwhile, the Bank of England expects inflation to break 11% in October, when the fuel price cap is set to increase dramatically.

Consumer confidence falls, shares climb

Despite the worsening cost-of-living crisis in the UK, the FTSE 100 and 250 climbed 2.7% and 1.1% respectively over the week.

In the Eurozone, the story was the same, with seemingly negative economic data being followed by a rise in equity markets. However, the manufacturing sector was hit especially hard, as a set of Purchasing Manager Index (PMI) figures – often used as a measure of business confidence – fell last week. Yet in contrast, the MSCI Europe ex. UK index climbed 2.4%.

Across the pond in the US, the S&P 500 climbed an impressive 6.4% over the week, while the tech-heavy NASDAQ achieved its largest gain since March and jumped 7.5%.

These gains came despite US consumer confidence dropping to its lowest-ever level – as measured by the University of Michigan’s sentiment indicator – due largely to surging inflation poking at an already tender spot of the decreasing disposable income of many.

Interest rate hikes

Stock markets recovering in this way might be unexpected, considering recent headlines around the risk of recession, increasing interest and inflation, and the ongoing war in Ukraine.

Why is the market behaving this way? Investors are hoping the risk of recession will lead to reduced demand and therefore lower inflation. As higher interest rates create a hurdle for economic growth, there’s hope that central banks will be more conservative when hiking interest rates than they may have otherwise been.

Kristina Hooper, Chief Global Market Strategist at Invesco, said:

“Markets are still digesting the dramatic shift that began only a few months ago. Once the Fed has finished its “frontloading” of rate hikes, I suspect the environment will become less hostile for asset prices, especially higher quality credit but also equities. If Western central banks can slow tightening later this year (they likely feel some pressure to keep up with the Fed) it would potentially help the asset price environment. A long-awaited moderating in inflation should also help.”

Similarly, Chris Iggo, Chair of AXA IM Investment Institute and CIO of AXA IM Core, noted:

“In the US, there are signs that demand is slowing and that some parts of the economy are seeing a build-up in inventories and price discounting. Signs of easing price pressures and slower growth are necessary to get the Fed to suggest that enough is enough. Keep in mind that the Fed wants to get inflation back to target over the medium term but also to achieve a soft landing. That means it will pivot at some point, once the data shows the economy slowing meaningfully. Avoiding a housing market collapse or a financing crisis in the corporate sector is very much in the Fed’s thinking.”

He added that equity returns will likely rebound if the Fed is able to avoid a recession, and it will be growth stocks that lead the way if inflation turns lower over the next couple of years. Iggo noted:

“After all, labour market tightness, more aggressive unions, higher wages and supply chain issues make even more of a case for technology and automation.”

Long-term market predictions

While we are seeing evidence that markets are bouncing back, it’s important to remember the market remains volatile. Ensuring your portfolio is well diversified is especially important with so much uncertainty, and it’s worth taking a moment to ensure you are not taking any unnecessary risks in your portfolio.

While there are reasons to be hopeful that markets could begin to recover, a number of commentators warned that the future is harder to predict long-term. For example, John Higgins, Chief Markets Economist at Capital Economics, said he found it hard to imagine the stock market recovering much more ground as long as there remain concerns “that the Fed will drive the economy into the ground in an effort to bring down inflation.”

Wealth Check

Many young people want to save for the long term but there are often more immediate financial concerns that take priority. From paying off student loans and saving for a house deposit, it’s easy to put off planning for retirement and avoid thinking about the distant future.

As people sometimes struggle to imagine their future selves, it makes it harder to have empathy for themselves and to commit to long-term savings and pensions. Unfortunately, that often leaves them short of money in later years – significantly affecting their financial well-being.

What is self-visualisation?

Future self-visualisation is a powerful psychological tool that can change this mindset. It’s a great tool for motivation and often used by elite sportspeople, who picture themselves at the Olympics, hearing the crowd’s roar and feeling the triumph of achievement as they receive a gold medal.

You can use the same technique to imagine yourself later in life – free from any unwanted financial burdens. Once you have an understanding of your future self – including your spending and saving priorities – visualisation helps to create a positive mindset. It helps to realise everything you may achieve in the future by working towards financial security now – the positive effects of becoming a long-term saver.

How to harness self-visualisation

Visualising scenarios with as much detail, vibrancy and emotion as possible will be most effective. For example, think about where you would like to live if money were no object, or what hobbies or interests you would pursue if you had more free time.

Allow yourself to sense what life could be like once you achieve your financial goals. Then ask yourself, ‘If I want these versions of my future, how will I afford them?’ Consider how you can give yourself options, so that when the times comes, you have options about how, when and what you spend your money on.

Taking action

Implementing small changes now will make a big difference long-term. Things like putting money aside for emergencies or creating a savings bucket for medium-term goals will help you get into the savings habit. If you need help deciding where to start, you can talk to a financial adviser.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“Next year, the triple lock will apply for the State Pension. Subject to the Secretary of State’s review, pensions and other benefits will be uprated by this September’s CPI which, on current forecasts, is likely to be significantly higher than the forecast inflation rate for 2023/24.”

Simon Clarke, Chief Secretary to the Treasury, confirms the government plans to reintroduce the triple lock pension, despite the current high rate of inflation.

AXA and Invesco are fund managers for St. James’s Place.

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.

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