WeeklyWatch – US stocks rise on positive economic news and falling inflation

1^st August 2023

Stock Take

US stocks surge amid improving economic data

US stocks increased last week as a result of good economic data and declining inflation rates, which raised confidence that the country could manage inflation while expanding the economy.

In June, inflation dropped to only 3%, compared to 3.8% in May – which is now only 1% more than the Federal Reserve’s 2% goal.

‘Core’ inflation, which excludes costs for food and energy, decreased more than anticipated to 4.1%. Core inflation can help provide a steadier picture of actual inflation by excluding more volatile sectors (it won’t be as influenced by a rise in the price of oil, for example).

Markets speculate as Fed resumes rate hikes

The Fed convened last week and decided to resume interest rate increases after suspending them in June. Interest reached its highest level in 22 years after the agreed-upon 0.25% rate rise.

Following a delay in June, markets had already largely anticipated this move, so the messaging style that accompanied the rate hike was of more importance. Investors might try to assess the mood within the Fed through speeches and communications from key decision-makers in an effort to better predict future actions.

Given this, Fed chairman Jerome Powell said:

“It is certainly possible that we would raise the funds rate again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady.”

Chief Investment Officer of BlueBay Asset Management, Mark Dowding, said this meeting “passed without much comment”. He added:

“Money markets are evenly split in terms of whether this week’s hike will be the last of the cycle or whether there will be one further move to come in September or in Q4.”

Since rates have already reached a 22-year high of 5.5%, Dowding speculates that the Fed is likely close to stopping rate rises overall for the time being.

Interest rate impact on US economy

Questions regarding the potential reduction of interest rates are anticipated to arise once inflation returns to normal.

Although it is a crucial factor to take into account, the Fed will also be looking at other factors. It will also examine the overall state of the US economy. Powell and his peers may be pleased in this case.

Economists will often look at these inflationary eras through the lens of the Goldilocks story. An increase in interest rates might cause the economy to enter a recession. Runaway inflation may occur if the Fed doesn’t take strong action. A ‘soft landing’ – where inflation is kept under control without sparking a recession – can, however, happen if they get it ‘just right’.

Strong US economy defies market projections

This Goldilocks story was reinforced by fresh GDP data from the previous week. The US reported that its economy expanded 2.4% year-on-year in the second quarter. This was far above market projections and higher than the 2% figure from the first quarter.

It was no surprise that US markets enjoyed a favourable week, given that inflation is declining and the economy appears to be doing well. For instance, the S&P 500 increased 1.01% for the week. Once more, the huge tech mega-caps were mostly responsible for this performance.

European markets show slow inflation decline

The markets in Europe were less active. Although inflation has been declining on this side of the Atlantic as well, it has done so more slowly and in tandem with a slowdown in economic growth.

The FTSE 100 companies’ performances varied in the UK, where inflation is still greater than in the US, and the weekly return was only 0.4%.

Similar results were seen in France, where the CAC 40 returned 0.59%. The German DAX Index increased 1.81% in the meanwhile.

Even though the European Central Bank raised interest rates last week, there is a growing feeling that these rate hikes are nearing their conclusion as inflation continues to decline throughout the continent.

Wealth Check

If you’re thinking about leaving your business or maybe just releasing some of the value, private equity (PE) firms could be a potential buyer. But as with everything, there are pros and cons to selling to PE investors. It’s important you understand the benefits and risks before making important decisions.

Advantages

As a SME owner, you will have added value to your company during the course of its lifetime. That amount could even make up a significant portion of your fortune. You may be able to capture that value by selling part of your stake in the business to a PE investor, releasing capital for personal financial goals while still having a stake and a role in the firm.

A private equity investment might give the company a cash boost in addition to facilitating your exit. This means you could finance growth projects like growing your business or investing in cutting-edge technology.

PE providers can offer advice on anything from strategic planning to operational efficiency and market expansion because they often have knowledge and experience specific to your business. For SME owners who lack specialised resources or knowledge, this might be very helpful.

PE firms frequently have broad networks and resources, so they could be able to put you in touch with possible clients, vendors or advisers to help you develop. Look for a PE partner who specialises in the area you wish to develop into – such as a certain industry or location.

Disadvantages

Any potential buyer will carefully examine your business, but PE companies can be more thorough. According to a British Private Equity and Venture Capital Association spokesperson, thorough paperwork, such as financial statements, forecasts, cash flow analyses and valuation assessments, would be required by PE firms. Plus, business records, contracts and other legal forms that may be needed.

PE firms frequently engage in tough negotiations. To grasp and thoroughly analyse the conditions, you need qualified advisers. Be prepared to stand your ground.

PE firms will have a huge impact because they often buy a sizable portion of the company. Employees and stakeholders may be impacted by changes in the company’s culture, management style and operational procedures that could happen as a consequence of new ownership.

Business exit strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.

In The Picture

The market’s performance during the last 18 months has been mostly influenced by inflation and interest rates. Western economies’ inflation is currently declining, raising concerns about the future of interest rates. The expected policy rates in various economies over the next five years are depicted in the chart below.

Source: Bloomberg, J.P. Morgan Asset Management. Guide to the Markets – UK. Data as of 21^st June 2023.

The Last Word

“When we reach net zero in 2050, a quarter of our energy needs will still come from oil and gas, and domestic gas production has about a quarter or a third of the carbon footprint of imported gas.”

– Rishi Sunak defends his decision to grant new licences to explore for oil and gas in the North Sea.

Bluebay is a fund manager 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.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. 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.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP approved 31/07/2023