WeekWatch -‘Despite dipping on Friday, US stocks had another good week as April ended’ April 2021
Despite dipping on Friday, US stocks had another good week as April ended. This contributed to a particularly strong month: the S&P 500 Index of large US companies had its biggest one-month increase since November last year, when vaccine discoveries began acting as a boost for the share prices of many companies.
Some market commentators had expected the election of President Biden to have a negative impact on US stocks, especially given his electoral promises on taxes and wealth distribution. However, the recent strong performance in the US market suggests that such fears appear overblown, at least for now, suggests Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.
“US equities continue to record new highs in the wake of stable conditions and upbeat corporate earnings. Notwithstanding President Biden outlining progressive-leaning plans for bigger government, higher taxes and greater income redistribution, it seems that stocks have been largely unperturbed.”
“In the period prior to the US elections, there had been a fear that a policy shift in such a liberal direction would be badly received in financial markets, but it seems as if markets are now happy to take this in their stride,” he added.
Meanwhile, earnings results released last month have given promising signs about the recovery prospects of many businesses. Combined with encouraging data about economic recoveries around the world, these appear to have given investors confidence that the economic recovery is under way.
Companies in Europe have exceeded analysts’ expectations over the past month. Goldman Sachs estimated last week that companies in the STOXX Europe 600 Index have beaten earnings estimates by around 15%. It was a similar story for the largest companies in the US.
While the earnings results have brought about some optimism for the future, they also contain clues about what corporate leaders are thinking. According to analysis by Bloomberg, the word ‘inflation’ appeared in last month’s conference calls with top executives twice as often as in the previous quarter’s calls.
Since vaccine programmes started rolling out last year, investors have been trying to calculate whether the economic bounce-back will lead to higher inflation around the world. Although low levels of inflation are normal, there is a concern that, if it grows too high, it could prompt governments and central banks to adapt their policies. Policies such as maintaining low interest rates have supported asset prices since the pandemic took hold last year, and have been especially positive for fast-growing technology companies. The first four months of this year have seen investors ‘rotate’ from these sorts of companies into the ones that they expect will benefit from a broad economic recovery and a new investing environment.
The prospect of higher inflation is something that fund managers are including in their calculations. It’s one of a number of factors they consider when investing your funds, to ensure that they are well positioned for the future.
“Inflation is not something we are too concerned about,” said Clyde Rossouw from Ninety One, manager of the St. James’s Place Worldwide Income fund and Continental European funds.
“The companies into which we are interested in investing tend to have pricing power, which means they can raise prices in response to inflation. The more advantaged a business is in terms of its business model, the more it can be effective in its ability to raise prices across the board, and therefore, still price its products or services ahead of whatever the broader inflationary forces are.”
For investors, of course, the best way to deal with uncertainty is to invest for the long -term with a well-diversified portfolio. If your funds are invested in a wide range of assets, then their performance won’t be overly reliant on any one outcome.
BlueBay and Ninety One are fund managers for St. James’s Place.
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