This week marked the end of the second quarter of the year. Continuing what we saw in the first, for investment markets (both fixed interest and equities) it has certainly been a challenging one.
Despite company earnings coming in broadly positive, the constant news flow around climbing inflation and central banks tightening have dented the already fragile market sentiment. To put it in context, the S&P 500, which tracks shares in America’s biggest companies, has fallen roughly by a fifth in the first half of this year. This is the biggest decline in the opening six months of a year since 1970.
Looking across the sector performance over the last six months, only energy managed a positive return as the price of oil rocketed following the invasion of Ukraine. Technology and consumer discretionary stocks were hit hardest as lofty valuations were questioned in the former and investors worried about how spending might be curtailed in an economic slowdown in the latter.
Central bankers from around the world gathered this week for the annual European Central Bank’s conference. While Portugal in June sounds very appealing, the mood music was pretty sombre. Central banks face the very difficult task of trying to bring down inflation without causing the economy to grind to a halt.
Whilst there are clear risks to getting it wrong on either side (with inflation getting out of control or the handbrake being applied too hard), it was clear which one they fear more. U.S. Federal Reserve Chair Jerome Powell remarked “is there a risk that we would go too far? Certainly, there’s a risk, but I wouldn’t agree that it’s the biggest risk to the economy. The bigger mistake to make, let’s put it that way, would be to fail to restore price stability.” Over the past decade, central banks have come to the rescue of the markets during times of stress. Recently, this hasn’t been the case; the central bank’s priority is now getting inflation under control.
For further advice on market trends, contact our investment management team on 01604 621 421.
John Naylor, Chartered FCSI – Head of Investment Committee