So much for a quieter summer...
THE market has been on an upward trajectory for several months as recovery is widely predicted. However, last week saw some markets drift lower, with the UK’s FTSE 100 down 1.6 per cent on the week, both the S&P 500 and the Nasdaq down by about 1 per cent and the Russell 2000 (US smaller companies) down by a more dramatic 5 per cent.
Summer usually sees a sharp fall in volumes, and we have seen some evidence of this, although it may be less dramatic this year, partly influenced by the flood of day traders who have taken this up during lockdown. In the US retail investors hit the headlines when they caused shares in “meme” stocks such as GameStop to soar despite hedge funds having short positions in them.
It is hard to totally dismiss the feeling that clouds are gathering on the horizon now. We have seen yet another surge in Covid cases (and this time it appears to be affecting the young to a much greater extent). With the massive central bank support, the spectre of inflation has reared its head and is now being reflected in statistics; issues that had taken a back seat during the pandemic are now coming to the fore again, such as trade tensions between the US and China.
On top of this there appears to be a rise in the US consumer savings ratio, causing concern that expenditure will not rebound as much as anticipated. Economic growth has not yet returned to pre-pandemic levels, but inflation is well above target: 2.5 per cent last month and forecast to hit 4 per cent by the end of the year.
There was a widely held view that we would see everything start to return to normal during the summer, but now a number of scientific advisers are predicting a third wave and even the possibility of a return to some restrictions as we head into the autumn. Headlines are dominated by fears that the NHS will be overwhelmed. The fact that this could require further support from the government is a concern: central borrowing is at record levels and a potential rise in interest rates due to inflation would make this much less comfortable for the Treasury.
In short, there is a lot going on (so much for a quiet summer!) but it is not all doom and gloom. Following an agreement reached by OPEC the oil price has fallen as output has been boosted from August, bringing a long running bitter dispute to a close. We have the Tokyo Olympics just around the corner to distract us, although this is not without controversy as we read about an increasing number of athletes testing positive. Climate change is also making headlines: although the unusually warm weather here is very welcome, the floods in Germany are obviously not.
In the face of such overall uncertainty, the most prudent advice is not to lose your nerve and stick to quality, in the long run this should pay off, but given all the circumstances it may be a very bumpy journey!
Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.