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WeekWatch -‘Last week brought mixed news for investors in one of the world’s largest stock market indices’ May 2021

WeekWatch -‘Last week brought mixed news for investors in one of the world’s largest stock market indices’ May 2021

Last week brought mixed news for investors in one of the world’s largest stock market indices. On the one hand, the S&P 500 Index of large US companies hit record highs. On the other, a monthly release of unemployment numbers tempered investor enthusiasm by demonstrating the ongoing economic damage caused by COVID-19.

The numbers showed that job creation in the US declined last month, falling below the figures expected by many analysts and economists. Around 266,000 new jobs appeared on company payrolls in April, which, despite heading in the right direction, was a considerable way off the million that were expected by some analysts and economists. Despite the improvement in employment in recent months, there were still over eight million fewer Americans working last month compared with February 2020. The news appeared to focus minds on the length of the road to recovery ahead.

As a result, last week’s market discussions had a familiar tone. Investors and forecasters were looking ahead to what the latest figures suggest about the health of the global economy due to COVID-19, what they suggest about the prospect of higher inflation, and what the policies of the world’s governments and central banks will need to look like in response.

Last week, the US Secretary of the Treasury, Janet Yellen, gave a talk at a conference that generated some headlines. Talking at an event hosted by The Atlantic magazine, she said that interest rates might need to rise in order to stop the US economy from ‘over-heating’ as its recovery begins in earnest over the summer. “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat”, she remarked. She dialled back her comments later in the day, but the statement did appear to unnerve some in the audience.

Since vaccine rollouts began picking up pace at the end of last year, investors have been trying to assess whether the speed of the expected economic recovery could lead to a phase of higher inflation. Some are concerned that it might eventually cause governments and central banks to make policy changes such as increasing interest rates, which were lowered last year to help keep the cost of borrowing down and help the market recovery.

Higher interest rates could be a challenge to the share prices of the companies that have seen their valuations soar over the past 12 months. Some large technology companies, for example, are trading at high valuations relative to their earnings. This is partly due to the way that low interest rates boost the share prices of fast-growing companies. Since November, the share prices of such companies have underperformed the share prices of those that were worst affected by the pandemic last year.

Investors are naturally focussed on the signals being given out by policymakers. However, while remarks such as Janet Yellen’s last week do generate headlines, they can also be seen as the responsible thing to do in an uncertain environment. Rather than hoisting up interest rates with no warning, it’s arguably better to give an insight into how policymakers are thinking in order to cause less disruption in the long-term, wrote Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

“It can be viewed that Yellen is just laying the groundwork, so that the nation and financial markets are prepared for rates to rise as the economy bounces back and returns to full employment in the months to come,” he wrote.

When deciding on their investment strategy, fund managers think carefully about the future investing environment. This includes topics such as inflation and interest rates, as well as the underlying prospects of the companies (or other types of investments) in their fund. For example, if it looks like inflation is going to return in the future, funds can be adjusted so that they’re better prepared for that possibility. The best way to deal with uncertainty is to invest for the long-term with a well-diversified set of investments. If your funds are invested across a wide range of assets, then their performance won’t be overly reliant on any one outcome.

BlueBay is a fund manager for St. James’s Place.

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