Global Market Overview – June 2021

June has been somewhat of an emotional whirlwind in UK domestic politics. On 14 June, we found out that we would have to wait another four weeks for full post-lockdown freedom. Two days later, Dominic Cummings released WhatsApp conversations in which Boris Johnson branded Health Secretary Matt Hancock as hopeless. Always nice to know the boss has faith in you… And then, at the end of June, we saw Hancock’s resignation following some now infamous CCTV footage.

Outside of Westminster though, things are heading in a positive direction. It’s not just that football might actually be coming home, it’s that over 80 million COVID-19 vaccine doses have been administered so far, and the benefit of these will be felt more and more as widespread immunity sets in.

In the US, the main talking point was the Federal Reserve’s slightly confusing messaging. On Wednesday 16 June, the Federal Open Market Committee meeting hinted that unemployment would be transitory and inflation wouldn’t be, and so interest rates might need to rise ever so slightly more quickly than previously thought. But then, in his testimony to Congress the following Monday, the Fed Chair Jay Powell was much more dovish, suggesting that both unemployment and inflation would be transitory.

The fear generated by the first announcement prompted an S&P 500 sell off. Powell’s later statement then reassured everyone, and the S&P bounced back up to exactly where it was before the first announcement. Making moves and changing portfolios off the back of every little announcement and micro-signal is not how we run money. Anyone trying to decipher short-term markets ends up flailing around and chasing their own tails. Most of the time, as the world returns to normal, the trick is to do nothing.

The numbers are staggeringly clear. The S&P 500 opened at 4245.6 on Wednesday 16, fell 2% to 4166.5 on Thursday 18, but then closed on Tuesday 22 after congress at 4246.4. Lots of selling and buying over the five business days to end up precisely where you started.

Core views

A new wave of economic growth… For the past decade or so, the virtuous circle of consumption and investment has just not been able to get going. The scars of the financial crisis were too deep – people bought less stuff while governments reined in spending. As a result, companies kept putting off investing in longer-term projects. The 2020 recession hit the reset button. People are willing to spend again, while governments have ditched austerity. And so, companies are starting to invest for the future. We are now at the start of a sustained period of growth, fueled by confidence and expansion across all sectors of the global economy.

And a little inflation won’t hurt… Economists tend to dislike thinking about the psychology of inflation, but in a lot of ways, someone’s inflation expectations are a good proxy for their confidence levels. With the right amount of price and wage growth, people are encouraged to make life decisions which are positive for the economy. We haven’t heard the word “Goldilocks” for some years now, but there really is an amount of inflation which is just right to keep things humming.

Summary

Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.

July 2021
With thanks to Seven Investment Management LLP for their views and market thoughts.
RiverPeak Wealth Limited

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