WeeklyWatch – Markets react as sun sets on Biden’s re-election bid

23rd July 2024

Stock Take

Presidential pivots, hung parliaments and plummeting retail

Even the most level-headed investors will sometimes be swept up by breaking news, and political issues have undoubtedly been weighing on minds in recent weeks.

Politics continue to prove a strong driver of markets, with the hung parliament in France, concerns over China’s fragile recovery and Biden’s withdrawal from the US presidential race being key issues.

On the latter, a Bank of America survey of nearly 250 fund managers revealed that geopolitical conflict had overtaken higher inflation as the biggest perceived risk to the investment outlook. That said – on a more positive note – 68% predicted a soft landing for the global economy, with growth and inflation gradually easing.

Internal and external conflict rocks the US

It’s been a turbulent few weeks in the US Presidential race. Last week saw mounting pressure on Joe Biden to step aside as a nominee, leading him to endorse Vice President Kamala Harris as his replacement.

Prior to this, the attempted assassination of Donald Trump left investors anxious about the global implications of ‘President Trump round two’. After a positive start to the week, European stocks declined due to fears of heightened trade tensions with the United States. Similarly, Chinese stocks fell following the selection of Trump’s vice-presidential running mate, JD Vance, known for his tough stance on China.

Indeed, all of these political worries appeared justified as global blue-chip stocks tumbled midweek. The trigger was a report suggesting that the Biden administration might further tighten restrictions on exporting semiconductor equipment to China. Concerns were aggravated by Trump’s remarks that Taiwan, the largest producer of microchips, should fund its own defence.

Tick-tock, tick-tock, tech

Tech companies aren’t completely immune from the economy around them, and a market shift away from the tech sector was a key feature of last week.

Concern over tech- and AI-based firms saw heavyweights such as Nvidia and ASML lead the falls, as the tech-selling mood stalked the rest of the market – world stock indices went into reverse towards the end of the week. Any anxiety was exacerbated by the global IT outage that created havoc, with businesses, banks, airlines and hospitals among the worst affected.

The average year-to-date gain for major tech companies like Amazon, Microsoft and Apple is 37%, which has continued to propel the broader market, echoing the trend from 2023. However, last week saw a significant shift as leadership transitioned to cyclical sectors and small-cap stocks. In the US, the likelihood of a more lenient Federal Reserve policy favours these more economically sensitive areas.

Regardless of whether this broadening of market leadership persists, this shift highlights the importance of keeping a well-diversified and balanced portfolio that has the scope to capture different sources of return.

Is China’s recovery running out of steam?

Returning to China, where equities also fell due to unexpectedly slow economic growth in the second quarter. Retail sales growth dropped to an 18-month low, and new home prices declined at their fastest rate in nine years – intensifying concerns that China’s fragile recovery is faltering.

In the midst of this apparent worsening economic outlook, the Communist Party Central Committee held its key policy meeting, known as the plenum, which occurs roughly every five years. Market hopes for a significant shift in policy were left disappointed, as the meeting concluded on Thursday with a restatement of ambitious economic goals but no detailed implementation plans.

UK inflation is too hot, while the retail sector cools

In the UK, inflation remained steady at 2% in June, defying expectations of a slight decrease. Services inflation was a big factor and remained too hot for the Bank of England’s (BoE) liking, partly due to an increase in hotel prices driven by US popstar Taylor Swift’s Eras Tour.

This data led investors to scale back their expectations for an interest rate cut in August. This sentiment was reinforced by news that wage growth, while slightly easing, was still at 5.7% in the three months to May, indicating the labour market is cooling too slowly for the BoE to act soon.

Despite the fall in inflation, the Office for National Statistics reported a 1.2% dip in retail sales in June, following a 2.9% rise in May, attributed to cooler, wetter weather discouraging shoppers from heading outside. The uncertainty leading up to the general election was also cited as a reason for the steeper-than-expected decline in sales.

Meanwhile, the European Central Bank (ECB) refrained from further cutting interest rates, stating that inflation would likely remain above its target well into next year. However, the ECB indicated that its September meeting was “wide open” to the possibility of further easing. The lack of clear policy direction from the ECB, coupled with a sell-off in tech shares, contributed to the STOXX 600 index recording its largest weekly decline this year.

Wealth Check

Balancing long-term care costs and inheritance plans

The subject of care can be a difficult and emotional one to think about. And often, when we do start to ponder it, the cost implications can make us shudder.

Pressing questions that may come to mind could be around the cost of fees and what they could mean for the nest egg you’ve saved for future generations. While it’s true that the high cost of social care can quickly swallow up your inheritance, with careful forward planning, you can mitigate the impact that care fees can have on your plans.

Financial planning for the whole family

No one can predict the future, but you might need to cover social care costs for longer than anticipated. The longer you live, the higher these costs become, reducing the amount of money available for your family. Additionally, your children may face a long wait for their eventual inheritance. To address this, some older individuals are now choosing to skip a generation by passing their wealth directly to grandchildren during their lifetime.

A multi-generational approach to finances keeps money flowing through families in the most tax-efficient way.

Broaching the subject

Addressing the long-term picture earlier in life, when children are still living at home for example, makes good sense. It’s important for everyone’s peace of mind that everyone knows how social care would be funded, if and when it’s needed. It can come as an unwelcome surprise to discover that an expected inheritance has been degraded by care fees.

Talking to your children about your plans and your wishes for later life care can be easier said than done, but with the right support and advice, you can get where you need to be – both now and as things develop in the future. A financial adviser who’s one step removed can bring the parties together and find common ground and consensus.

Having these conversations early means everybody knows what to do and is comfortable with it, should long-term care be needed.

The Last Word

“It has been the greatest honour of my life to serve as your president. And while it has been my intention to seek re-election, I believe it is in the best interest of my party and the country for me to stand down.”

Joe Biden announced he will no longer stand for re-election in November.

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SJP approved 22/07/2024