June saw the investment markets take further hits, which was highlighted by the S&P 500 Index in the US, which posted its worst first six months of the year since 1970. As we have been advising for the last few months, these are certainly very challenging times for your investments.
Rising inflation, which has been on the ascendancy for two years now, and the impact it is having on economic growth are all contributing to the general malaise we are experiencing. Central banks are now having to walk a tightrope of increasing interest rates, to curb inflationary issues, whilst balancing this against tipping economies into a recession. Stagflation (high inflation and low economic growth) is becoming a real possibility for some countries.
The inflationary issues are proving to be toxic for the investment markets with almost all the sectors being extremely volatile, which includes equities, bonds, and currencies. Under normal market conditions, we would hope that fixed interest would provide the ‘safety net’ when equities are being sold off. However, in this rare period for the investment markets, they have correlated. In fact, in some markets such as the UK, they are performing worse.
Let’s look at some of the main economies around the world.
Here in the UK, the Bank of England (BoE) raised based rates for the fifth consecutive increase since December 2021. The UK’s base rate was raised to 1.25% from 1.00%, which is now the highest level seen since 2009. During June, the FTSE 100 Index was down by 5.8%, and the FTSE 250 Index fell by 8.6%.
During May, the UK’s annualised rate of consumer price inflation rose to 9.1% from 9.0% in April. The expectation is now that inflation will rise above 11% in October, which will be exacerbated by more increases in energy costs. The BoE has advised that they would “act forcefully” in an attempt to control these inflationary pressures.
Over in the US, the Federal Reserve (Fed) increased its key interest by 75 basis points in June. This saw their rate increase to a range of 1.5% to 1.75%, which was the largest increase since 1994. It is widely expected that rates will continue to rise through 2022, with the potential for another one as soon as July. The Fed has already indicated that they expect, by the end of this year, for rates to have risen to 3.4%.
Of course, these rate hikes are being used to try to combat inflation, the same as in the UK, although as can be seen, they are taking much bigger steps. In May, the US saw the largest 12-month increase in consumer price inflation since December 1981, which accelerated to 8.6%. During June, the Dow Jones Industrial Average Index fell by 6.7%, and the S&P 500 Index fell by 8.4%.
The European Central Bank (ECB) has so far avoided raising its rates to combat the inflationary pressures being seen. However, this is about to change, as the ECB is set to increase their rates in July, which will be the first time in over 11 years. The ECB intends to increase by 25 basis points during the month, in a bid to tackle inflation. During May the eurozone’s rate of inflation increased to 8.1%, and like elsewhere in the world, this is expected to stay high for some time to come. The German Dax Index saw a drop of 11.2% over June.
Elsewhere in the world
However, not all countries are having to battle inflationary pressures. In Japan, their rate of consumer price inflation rose to 2.5% during May. This has meant that the Bank of Japan can remain committed to its programme of negative interest rates and bond purchases. The Nikkei 225 fell by 3.3% during June.
We understand that the current economic and market news is very disheartening. However, we remain convinced that by investing over the longer term, the news will get better, and you will see a turnaround in the values of your investment portfolios.
As always, if you would like to discuss any aspect of your financial planning, please do not hesitate to get in contact with us.
Enjoy your summer and let’s hope for some positive news in the markets in the second half of the year!
Who should you contact for more information?
Director Richard Brazier
Financial Adviser Amanda Beacon