This month I want to try and give some reassurance regarding how unpredictable the Markets are and why forecasts from even the most respected of sources, are frequently unreliable. The Fed and Bank of England are just as hopeless as everyone else. We should remember that these are the same Banks and personnel who failed to see the inflationary flames they were fanning through Quantitative Easing.
Last week saw the USA and UK increase interest rates by 0.75% but both confirmed that the expectations of how high interest rates will eventually reach, are too high. The US Market fell as a result of this.
The US, which is really the ‘engine room’ of global growth, expects that future interest rate increases will be a succession of small increases but that they will wait until they see the effect of last week’s increase before planning more rises. With the Mid-Term elections this week we will undoubtedly see some market volatility as the expectation is that the Republicans will control the House of Representatives, and this is likely to lead to ‘you know who’ announcing he will run for President again.
As for the UK, the 0.75% increase was accompanied with the news that the UK is likely to have a longer recession than expected and could be for up to two years. The Market rose by nearly 4% as a result! I have said previously that the Market doesn’t like uncertainty and the build up to a recession is often the more volatile period.
Typically, a recession results in some companies shifting their ‘dead wood’ and then becoming more profitable as the economy picks up. There are sectors in the economy that have staff shortages, so unemployment is less likely to be the usual recessionary problem.
Obviously, some companies will fail during a recession because the consumer support isn’t there for them. However, this recession is not based on consumer spending, it is based on lack of supply (because of Covid) and an increase in fuel costs (because of Russia).
The fact is that everything you buy has fuel costs associated with it – either by way of transportation, storage and production. Once we see this being controlled, we will undoubtedly see costs reduce and inflation drop.
This month sees the Autumn statement – or mini budget – and we are bound to see some form of tax increase so it will be interesting to see how the Market reacts to this. They might think it will add to the slowdown and therefore interest rates will not need to increase so much, or they might think that the increase will reduce spending and therefore make the recession worse.
Due to the volatility of Markets and the uncertainty over the immediate future of the economy we are still not proposing any changes to the asset spread of our portfolios. We are taking the longer-term view and I must repeat my usual mantra: investing for the medium to long term, 5 years plus, gives every potential of overcoming any short-term market volatility.
The information provided in this report is based on our own opinion and offers no guarantee that our expectations will be met. Past performance is no guide to future results. As always, should you have any concerns you wish to raise, please do contact us.
Ian Pennicott APFS
Chartered Financial Planner