28 June 2022
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.”