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Will Freedom Day represent the top of the market?
The UK’s Freedom Day should have been cause for celebration. Instead, we’re having to navigate choppier stock market conditions, hundreds of thousands of children and workers are stuck at home isolating, and don’t even mention the Euro 2020 result.
It’s worth understanding what has driven the increased market volatility. Global stock markets experienced a big sell-off on 8 July as investors started to panic about the strength of the global economic recovery. Earlier that week, China signalled it still needed to support its economy which spooked the market, fearing that its next set of GDP data might disappoint.
To make matters worse, Covid infection rates are on the rise again in various parts of the world, despite the rollout of vaccines. On top of this, there is a theory that the initial consumer spending splurge post-lockdown may now lose steam.
On 8 July, the FTSE 100 fell by 1.7%, wiping £32 billion off the value of the index. Hong Kong’s Hang Seng index slumped by 2.9%, Germany’s Dax index declined by 1.7% and the US S&P 500 index dropped by 0.9%.
Bond markets had already given some clues as to how investors were thinking as bond prices have recently been rising and yields falling. This suggests people have been putting more money into seemingly safer parts of the market and becoming less concerned about inflation risks.
Inflation is generally bad for bonds and for long-duration assets such as tech stocks, so the fact investors are interested in both these areas again would suggest they now share the view of central banks that the rise in the cost of living is only ‘transitory’.
The next issue for UK investors is how the coming few months play out in the domestic market. With more restrictions being lifted, theoretically it should provide greater opportunities for companies to make money. However, the fact that prime minister Boris Johnson is telling people to be more cautious as the restrictions are lifted doesn’t suggest 19 July will trigger an immediate boom in spending and investment.
‘It doesn’t feel like an environment to be taking lots of risk,’ says Ruffer investment director Duncan MacInnes. ‘Just as the Coinbase IPO marked the top in bitcoin, perhaps Freedom Day when we reopen the economy could mark the top in markets. That would be quite paradoxical.’
He makes a good point, particularly as markets have already priced in a lot of good news from the reopening trade.
MacInnes says there are lots of competing forces. On one hand there is evidence of economic recovery, ongoing support from governments and central banks, and the stock market being one of the few places to earn a return in an era where cash pays next to nothing.
On the other hand, one must also consider that many countries have a very large debt problem, and the economic recovery may well have some setbacks in the coming months. If you consider these issues, together with supply chain challenges, skilled staff shortages and rising inflation, the backdrop is not particularly friendly to investment markets.
We often give the same response in periods of uncertainty and it is worth repeating now. It really does pay to have a diversified portfolio and to keep feeding it with more money in good and bad market conditions. Be patient and do not panic.