WeeklyWatch – Overreactions or genuine market struggle?

13^th August 2024

Stock Take

Kicking up a fuss over nothing?

The start of August saw a rise in panic in response to market behaviour, but now that the dust has finally begun to settle, it’s left a large number of investors scratching their heads and wondering: ‘What was that all about?’

Global share prices began to unwind two weeks ago after the Bank of Japan raised its interest rates, resulting in a leap in yen prices. Alongside this news was the increasing concern that the US were about to enter a recession after reporting weak job market data.

Last Monday saw the culmination of all the widespread worry when the Nikkei fell dramatically by 12% in a single day’s trading. Indexes in both Europe and the US followed a similar pattern when they revealed significant drops, despite being less dramatic than the Nikkei.

Rumours also began to circulate that involved the Federal Reserve calling an emergency meeting to cut US interest rates in a bid to keep the American economy in positive territory.

Keep calm and carry on

But as Tuesday dawned, there was a noticeable start to market recovery. Analysts could breathe a sigh of relief and left with the feeling that there had been quite the global overreaction, exemplified by the Federal Reserve Bank of Atlanta’s GDP forecast for the third quarter that stayed consistent at a healthy 2.9%.

The Chief Investment Officer at BlueBay, Mark Dowding, notes:

“Broadly speaking, US data are consistent with a softish landing and there is little evidence to back up a recessionary claim. Looking at an array of statistics on the US labour market, the picture remains healthy. The unemployment rate rose last month, but there were hurricane-related distortions in this figure.”

Despite this…

The second half of last week saw some much-needed recovery, but that didn’t deter from the fact that August had been a tough month for investors. Since the beginning of the month, the NASDAQ and S&P 500 have been down, 4.8% and 3.2%, respectively.

Technology companies have been largely responsible for the fall after driving the majority of equity price growth over the past year. Heavy reliance on these companies is problematic and their recent stumbles serve as a poignant alert that diversification is essential.

Is all okay in the UK?

UK shares have fared a bit better this week, however, they fell by 2.1% at the end of last week. Unlike the US, who are heavily reliant on the success of the huge technology companies, the UK’s markets had a boost from the more diverse companies that operate within the FTSE.

If we isolate the five days last week that the market was open, the FTSE 100 saw a little bit of growth. The UK is getting ready to reveal their inflation figures later this week, and widespread expectation is that there will be an increase above the 2% target that was recently achieved. The Bank of England would likely have been aware of this upcoming announcement when they made the decision to decrease UK interest rates, meaning that an inflation increase will be unlikely to shift their stance or alter any decisions.

Japan rides the wave out

The Japanese market has faced quite a turbulent time as of late. After the Nikkei’s 12% drop on Monday, it clawed back a 10% recovery on Tuesday and was only down 4.8% by the end of the week.

Having said this, the week prior to last was certainly not much easier for the Japanese market. It means that it’s been down 10% since the beginning of August. This is significant as, before the markets underwent this period of volatility, the Japanese market had been one of the best performers of the year. And in light of all the recent falls, it’s still up over 4% so far this year.

Let’s all learn to take a deep breath

Although markets have now calmed down, the recent happenings should serve as a reminder of the basic elements of investing. One thing to bear in mind is that markets will fluctuate, and that’s why it’s imperative that you diversify your investments.

On the back of the Tuesday market boost last week, we can see why panicking during market falls isn’t a good idea, and short-term financial decisions can have a big impact on your long-term objectives.

The Head of Strategic Research at Schroders, Duncan Lamont, identifies that selling your holdings after a big fall is often tempting and emotionally driven. However, he states:

“Our research shows that, historically, that would have been the worst financial decision an investor could have made. It pretty much guarantees that it would take a very long time to recoup losses.

“For example, investors who shifted to cash in 1929, after the first 25% fall of the Great Depression, would have had to wait until 1963 to get back to breakeven. This compares with breakeven in early 1945 if they had remained invested in the stock market. And remember, the stock market ultimately fell over 80% during this crash. So, shifting to cash might have avoided the worst of those losses during the crash, but still came out as by far the worst long-term strategy.”

BlueBay and Schroders are fund managers for St. James’s Place.

Wealth Check

A career hampered by injuries

The worst nightmare of any elite sportsperson is to suffer a career-ending injury or illness. It can strike at any time, during your professional peak or while striving towards it. All the accolades and financial rewards…it can all be ended with one bad tackle, a twisted limb or a major diagnosis – your path can change dramatically.

Thankfully, there are huge advancements and breakthroughs being made in the treatment of sports injuries, meaning that an injury that would have ruled an individual out years ago can either be successfully treated or managed. But the risk is always looming, and it’s an eventuality that would be wise to prepare for, particularly when it can have a significant impact on your finances.

Time to brush up on your financial education

When preparing for the worst-case scenario, financial education is key. Without sufficient financial awareness, you may not know what actions you need to put in place.

One of the key areas of understanding the importance of early financial planning at the start of your sports career is that it’s likely to be short and could be cut even shorter as a result of injury.

Spending all your income is an easy trap to fall into, so learning to avoid the temptation is key. As a sports star, you could find yourself earning millions every year, a wealth that few are used to.

One rule that is favoured among many financial advisers is to save and invest at least one-third of your earnings. The 18-year-old that makes £50,000 a week may not see the immediate importance of this, but sadly, we’ve seen many highly paid sports stars become bankrupt at the end of their career, when that should never have happened.

Consider now, reap the benefits later

Cash-flow forecasting plays a big role in financial education. A financial adviser will sit with you and outline what your income is likely to look like in years to come. They will consider many variables including earnings, sums invested and the subsequent performance of those investments. This is pivotal in providing you with a perspective of the future and encouraging you to start formulating and putting financial plans in place right at the start of your career.

On top of diligent financial planning, it’s also important to make sure that you’re putting enough money aside to keep you covered with the right insurance. This involves taking out a career-ending insurance policy and paying regular premiums. This way, if you suffer an injury or serious illness which results in you being out of contract, you’ll receive a tax-free lump sum that will compensate for the income that you would have received.

The value of an investment with Wellesley 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 levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Where we refer you to an insurance specialist, their services will be separate and distinct to those offered by Wellesley.

The Last Word

“We know the Olympic Games cannot create peace. But the Olympic Games can create a culture of peace that inspires the world.”

– Thomas Bach, President of the International Olympic Committee, reflecting on the Paris Olympics which ended over the weekend.

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 2024. FTSE Russell is a trading name of certain of the LSE Group companies.

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© S&P Dow Jones LLC 2024; all rights reserved.

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 12/08/2024