Stock Take

Markets were on central bank watch last week, as policymakers in the US, UK and Europe met to make their final interest rate decisions of the year.

First up was the US Federal Reserve on Wednesday, which left rates unchanged; but it was the shift in tone from Chair Jerome Powell that got markets buzzing. He gave the clearest indication yet that the Fed believes its era of monetary tightening is over and that cuts are coming into view.

Of the 19 Fed policymakers, 17 see interest rates being lower by the end of 2024, with the central bank’s dot plot suggesting officials anticipate a cut of 0.75% next year. Powell declared “real progress” on bringing inflation back to target and expressed optimism that the US economy was zeroing in on an elusive soft landing. Those hopes were boosted by a rebound in US retail sales in November, which provided more evidence of consumer resilience.

Global share markets surged to their highest in over a year and a half, while the US Dow Jones Index hit a record closing high.

The rally came after the mood was dampened earlier in the week on news that US inflation unexpectedly rose in November. Stubbornly high rental costs pushed consumer prices up 0.1%, to register a year-on-year increase of 3.1%. This prompted investors to push back expectations of any interest rate cuts until at least May. However, Wednesday’s upbeat assessment saw futures markets price in a March start to rate cuts.

“From a market perspective, it seems like the Fed has given a green light to risk assets and it would not be surprising to see strong price action into the end of the year and early January,” suggested Mark Dowding of BlueBay Asset Management. “Economically speaking, we also wonder whether a boost to animal spirits could lead to an acceleration in economic activity rather than the slowdown many have been expecting.”

But Dowding believes the Fed is taking something of a gamble. “With wealth effects buoyant, the labour market robust and incomes rising, one also wonders whether inflation will decline as quickly as policymakers are hoping for.”

Before the Bank of England’s (BoE) meeting on Thursday came a raft of data indicating the declining health of the UK economy. Wage growth slowed by the most in almost two years, but at 7.3% in the three months leading up to October, it is still outpacing inflation. The number of UK job vacancies continued to fall, registering the 17th month in a row and the longest period of decline on record.

Recessionary fears were reinforced with news that the UK economy shrank 0.3% in October, after growth of 0.2% in September. The decline was more than had been expected and was attributed largely to the bad weather hitting retail and tourism, and the continuing squeeze on consumers caused by higher interest rates. The UK economy has now flatlined in the three months to October.

In announcing that it had held UK interest rates for a third time, the BoE predictably stuck to its script and said it was too early to speculate about when they will be cut. Minutes from the Monetary Policy Committee meeting reinforced concerns that UK inflation remains worse than in the US and eurozone, and that measures of wage inflation were also considerably higher.

The European Central Bank (ECB) was the last to show its hand and followed the BoE’s lead by leaving borrowing rates unchanged, giving no hints about a possible reduction. Indeed, ECB President Christine Lagarde highlighted instead that inflation would soon rebound, and price pressures remain strong. Business activity surveys at the end of the week indicated the eurozone economy is almost certainly in recession.

“The disinflationary process is well underway, so lower rates are coming,” commented Michael Kelly at PineBridge Investments. “The ‘new normal’ after the Global Financial Crisis (GFC) was an aberration, so think in terms of a return to the pre-GFC “old normal”. Yet pace matters. Markets have run well ahead of the central banks, having already priced in three-quarters of what one should expect outside of a recession developing. After this recent very rapid repricing, expect a pause on the trend towards lower rates in 2024.”

The week ended with some cold water thrown on investors’ excitement as New York Federal Reserve President John Williams pushed back against rate cut expectations, reiterating that the central bank remains focused on bringing inflation down to its 2% target. But it wasn’t enough to prevent the S&P 500 Index from registering its longest streak of weekly gains since September 2017, up nearly 23% year-to-date.

Wealth Check

Life has a habit of lobbing us curveballs, even if we have the best laid plans for our finances. You can’t predict when you’ll need to help your children out, or if you find yourself between jobs unexpectedly. But when you hit one of those bumps in the road, it can damage both your budget and your personal wellbeing too.

Some big expenses you can plan for, such as buying your first home, launching a business, or saving enough for retirement. But how do you deal with those short-term, high-impact financial challenges that we all face from time to time? Anything from redundancy to an unexpected tax bill.

Money worries can have a huge impact on our overall emotional wellbeing. Any change to our financial situation makes us feel uneasy, and less in control.

As financial advisers, we have conversations about money with families every day – in good times and bad. But we know that for many people, talking about money and budgets isn’t easy, and it can be even more difficult among family members.

Many families are feeling the pinch right now. The cost-of-living crisis isn’t over, and it’s a challenge for everyone. Even if you’ve always felt comfortably off, you may now find yourself needing to tighten your belt. And many of us will know from bitter experience that a conversation about money can be a major flashpoint in families.

Keeping quiet about rising debts and unpaid bills can be even worse for our mental health. Feeling guilty that the situation is somehow your fault can make it even harder to discuss the situation and the solutions openly.

Having expert, family-led advice from someone who’s one step removed can be a relief for everyone. It can also help you avoid more drastic action, such as cancelling insurance or stopping your pension contributions. These might be appealing short-term solutions, but your long-term plans could be seriously affected. Taking money out of your pension while markets are falling, or increasing your withdrawals if you’ve already retired, could put significant pressure on your pot.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

In The Picture

Despite significant challenges and short-term volatility along the way, 2023 has proved to be a generally positive year for stock markets. That said, performance hasn’t been even, and some sectors and regions have notably outperformed others.

Past performance is not indicative of future performance.

The Last Word

“Words cannot describe how I am feeling right now. It’s been a life-changing opportunity and I’ve had the time of my life dancing with Vito every week.”

Coronation Street star Ellie Leach celebrates winning Strictly Come Dancing.

BlueBay Asset Management and PineBridge Investments LLC are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 18/12/2023

Sovereign Wealth Limited is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website www.sjp.co.uk/products. Sovereign Wealth Limited is a Limited company registered in England and Wales, Number 07115386. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.