July played host to the biggest equity market rally since November 2020 (which was when news of a vaccine first broke), as the S&P500 finished the month 9.1% higher. The catalysts this time around, however, were far more subtle. With signs of disinflation beginning to appear, the US Fed striking a more dovish tone in the face of recessionary pressures and recent corporate earnings beating market expectations, the outlook for risk assets has started to improve. As always though, risks remain.
Inflation is stubbornly high. Despite interest rate expectations moderating, virtually all central banks (minus the Bank of Japan) are tightening. Growth forecasts have weakened, particularly across Europe thanks to a looming energy crisis. Business sentiment indicators point to a contraction in activity both in the US and Europe. Tensions between the US and China are on the rise, meanwhile the war in Ukraine continues. For investors, there is always something to worry about.
As investment managers, we focus on long-term objectives and remain undeterred by market noise. While cognizant of macroeconomic issues, staying invested and sufficiently diversified has been proven to generate stable portfolio returns over the long term. For those not currently invested, or with cash on the side-lines, now may be an appropriate moment to re-evaluate. Following this year’s sell off, equity valuations are now at levels that, since 1960, have been consistent with subsequent annualised returns of between 7-9% over the next decade and, at the same time, bond yields have materially risen. History would also suggest that waiting for the next correction can, in fact, pose a greater risk to future investment returns.
While many column inches this week will have been devoted to the Bank of England’s half a percentage point interest rate hike, or Nancy Pelosi’s antagonistic trip to Taiwan, or BP’s bumper earnings; will any of this have a meaningful impact on the overall long-term trajectory of global investment markets? I very much doubt it.
For further advice on market trends, contact our investment management team on 01604 621 421.
Ed Caswell, Chartered FCSI – Investment Manager / Associate Director