Stock Take
Last week saw a familiar pattern for those that have been following markets over the last year. Interest rates remained high, and large technology companies increased in value.
Last week it was the turn of Meta and Amazon to make the news. Meta, in particular, received a lot of attention after it reported a large growth in its fourth quarter profits and the intention to pay its first ever dividend. The combination helped the company grow 20% over the week.
Although not quite as dramatic, Amazon’s strong results also helped lift its share price notably, as it closed on its COVID-19 bubble historic highs.
These results helped drive the S&P 500 to another good week, as it ended up 1.9%, in local currency.
Markets were relatively unsurprised by the Federal Open Market Committee’s (FOMC) decision to keep interest rates at their current, relatively high rate for a while longer, when it met last week.
Mark Dowding, Chief Investment Officer at BlueBay, noted that the Committee is having to play a careful balancing act at the moment: “Although [Federal Reserve chair Jerome] Powell sought to downplay the idea that rates will decline as early as March, the market has shown appetite to front-run the Fed, and a narrative gaining traction is that where the market leads, the Fed will now follow.
“The Fed will have known that removing the bias would invite near-term rate cutting speculation. In this context, if the desire was to downplay and not feed these expectations, the FOMC could have retained the existing bias for a little longer, yet it chose not to do so.”
Job data will no doubt be one of the key indicators for any decision the FOMC makes. Last week the Bureau of Labor Statistics revealed 353,000 jobs were added to the US economy in January, as the US economy continued to display remarkable resilience. This number shocked analysts, with forecasts generally expecting around 200,000.
For Joe Biden, heading into an election campaign, these figures would have been encouraging. However, from the Fed’s perspective, such high numbers will reduce the rush to bring down interest rates. Powell said as much over the weekend: “The danger of moving too soon is that the job’s not quite done.” The wait for an interest rate cut is likely to be a little longer than previously expected.
British interest rates are also likely to remain at their current, high, level for some time. Last week the Bank of England’s (BoE) Monetary Policy Committee chose to keep interest rates at 5.25%. BoE Governor Andrew Bailey noted the current question the Bank was asking itself was “How long do we need to hold this position for?”
According to Hetal Mehta, St. James’s Place Head of Economic Research, the UK is likely to be behind its EU and American counterparts in this regard. She said: “The BoE has confirmed what most market participants had taken as a given: that the MPC as whole doesn’t have a hiking bias anymore. However, today’s vote split was not consistent with market expectations at this stage of the inflation cycle. While much progress on overall inflation has been made, services inflation – rightly so – is concerning the BoE. We still think the BoE is likely to be behind the ECB and Fed in cutting rates.”
Overall, the FTSE 100 ended the week down 0.3%.
Turning to China, share prices had another tough period. Two weeks ago, Chinese equities reported an uptick, on the back of policy tweaks by the People’s Bank of China. However heavy selling pressure returned last week with the Shanghai Composite shedding 6.2% in local currency terms. Local indices have now sunk to their lowest level in for five years prompting the China Securities Regulatory Commission to release a statement flagging its intention to step up market stabilisation measures. However, the statement was vague on detail and so time will tell as to how successful their actions may be.
Wealth Check
Interest rates and inflation rates can fluctuate dramatically, as we have seen in the past two years. And that can have a very real effect on the spending power of your savings and investments, as well as your day-to-day household expenditure.
Rising inflation means most things cost more. And the knock-on effect of that is that any savings you have won’t buy as much in the future, unless the interest that you are earning on them outstrips the rate of inflation.
So it’s a wise idea to check your current interest rates on any Cash ISAs or savings accounts, to see how they measure up against inflation, whenever new monthly figures are released.
When it comes to beating inflation, relying solely on your high street bank savings isn’t always the best strategy.
While banks do pay interest on instant access savings and Cash ISAs, the typical high street rates don’t always outpace, or even keep pace with, inflation. As we’ve seen, this means that the purchasing power of your savings slowly declines.
If you’re planning on saving over the long term, then investing could be a better way to shield your money from inflation.
The key to aiming to beat inflation is by investing in assets which have the potential to produce a higher rate of return than interest rates. Over the long term, that tends to be equities – stocks and shares. They have the ability to outpace inflation, although that doesn’t always guarantee that they will.
Spreading your investments across different types of assets – such as equities, bonds or property – is also a good way to diversify and strengthen your portfolio.
You should be aware, however, that investing does come with a certain degree of risk. An adviser will always discuss what level of risk you feel comfortable with, and help you choose a diverse portfolio that’s appropriate for you, and your long-term financial goals.
Please be aware past performance is not indicative of future performance.
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.
Equities do not provide the security of capital which is characteristic of a deposit with a bank or building society.
In The Picture
The past four years have seen China become an automotive superpower, with its passenger car exports growing at a rapid pace.
The Last Word
“All I want to do is keep being able to do this. I love it so much. It makes me so happy. It makes me unbelievably blown away that it makes some people who voted for this award happy too.”
Taylor Swift after becoming the first artist in history to win four Album of the Year awards at the Grammys.
BlueBay is a fund manager for St. James’s Place.
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SJP Approved 05/02/2024