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WeekWatch -‘On Thursday, the S&P 500 and Nasdaq both posted 1.7% increases’ Oct 2021

WeekWatch -‘On Thursday, the S&P 500 and Nasdaq both posted 1.7% increases’ Oct 2021

Investor fears around supply constraints, and inflation worries, were eased by a series of strong results posted last week exceeding market forecasts . The recovery was further aided by a bounce back from last week’s tough trading period.

On Thursday, the S&P 500 and Nasdaq both posted 1.7% increases. In the case of the S&P 500, this represented the biggest single-day increase since March. That said, both remain well below the historic highs they reached earlier this year.

There remain a number of potential concerns on the horizon for investors. On Wednesday, the Bureau of Labor Statistics revealed US headline inflation in September went back up to 5.4%, the 13-year high attained in the summer. Although the Federal Reserve (the Fed) and other central banks have maintained these rises are transitory, as inflation continues to increase over time, there is increasing pressure on it to act.

This could include raising interest rates and slowing the rate at which the US government is purchasing securities. Minutes released last week from September’s meeting suggest the Fed could begin to moderate the rate of its asset purchases soon.

In the UK, a similar debate is occurring. September’s inflation figures are not due out until next week; however, many are anticipating the Bank of England (BoE) will look to raise interest rates sooner rather than later if inflation persists above 2% for much longer.

Alistair Wilson, partner at TwentyFour Asset Management, for example, noted: “Investors face more challenging markets, and rates are a contributing factor; traders are now anticipating a BoE base rate of 1% by the end of next year. Meanwhile, interest rate swaps are pricing in the first change in monetary policy from the Fed in September 2022. In addition, an easy resolution to supply-chain disruption looks increasingly unlikely, and the UK looks particularly vulnerable due to a lack of HGV drivers – again, an issue unlikely to see a quick or permanent solution. All of this is feeding into the inflation debate, with even Fed members beginning to doubt their ‘transitory’ message.”

Even with these worries, the FTSE 100 experienced its best week in months last week to hit a post-pandemic high, as investors reacted positively to recent earnings. While high energy prices have hurt some segments, they have benefited others, with BP and Shell – two large companies on the index – being such benefactors. BP, for example, has experienced double-digit growth over the past month.

The recovery of energy firms is a good reminder of both the importance of diversifying an investment portfolio, and having a long-term outlook on investments.

 

However, EdgePoint portfolio manager Jeff Hyrich said many retail investors fall into the trap of investing with a short-term outlook. He said: “While society continues to make advancements in many areas, one area that’s going backwards is people’s attention span. In financial markets, the average holding period for U.S. stocks by retail investors has declined from eight years in the 1960s to less than five months as at August 2020.

“Although we know that having a long-time horizon is extremely important for long-term success, the average holding period for investors has shrunk by 95%! Most self-made fortunes are largely the result of owning and growing a business over years, possibly even decades, but surely not mere months. Stocks represent ownership interest in a business, not just pieces of paper to speculate on in the marketplace.”

The UK and US market performance was mirrored in the EU, where worries around inflation, high energy prices and supply chain issues had weighed down on markets in recent weeks. Last week, however, as a number of companies began to post better-than-expected results, markets were lifted. Overall, The STOXX Europe 600 grew by over 2% over the week . That said, it remains below its mid-August peaks.

An elephant in the room when discussing global markets is China, where regulatory crackdowns and the more recent liquidity troubles at construction giant Evergrande have left investors nervous.

Last week the People’s Bank of China renewed a ¥500 billion medium-term lending facility as it looked to ensure the country’s financial system had enough liquidity. Bloomberg has reported that the government was also loosening restrictions on home loans for some of its largest banks, as the government looks to restrict the fallout from the Evergrande problems.

EdgePoint and TwentyFour are fund managers for St. James’s Place.

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