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WeekWatch -‘US markets continued to struggle last week, as members of the Federal Reserve signalled they were willing to move faster to combat rising inflation’ April 22

WeekWatch -‘US markets continued to struggle last week, as members of the Federal Reserve signalled they were willing to move faster to combat rising inflation’ April 22

US markets continued to struggle last week, as members of the Federal Reserve signalled they were willing to move faster to combat rising inflation.

On Tuesday, Federal Reserve Governor Lael Brainard said “Today, inflation is very high, particularly for food and gasoline. All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources. That is why getting inflation down is our most important task, while sustaining a recovery that includes everyone,” said Brainard.

Brainard outlined two key methods the Fed will use to bring inflation down: a series of interest rate rises, and by starting to reduce the balance sheet at a rapid pace, starting as soon as next month.

In the US, the tech-heavy S&P 500 dipped following the news, as investors sold stocks in companies whose balance sheets are most vulnerable to short-term rate rises.

However, “some areas of equity markets manage quite well in an inflationary environment,” noted Stephanie Butcher, Chief Investment Officer at Invesco, co-managers of the St. James’s Place Corporate Bond fund. “What will really determine the extent to which the equity markets too can stay at these sorts of levels and where they move from here is going to be earnings delivery.”

Butcher adds that it is increasingly important to for investors to hold portfolios with a blend of assets and sectors. This is because diversification between different asset classes and different fund managers leads to improved client outcomes: it’s important have exposure to areas of that market that respond differently to inflationary environments to help you achieve smooth and consistent returns.

According to Mark Dowding, Chief Investment Officer from Bluebay, we are at a moment of maximum stress for central banks.

Turning to the UK, GDP growth for February was 0.1%, below market expectations of a 0.2% rise. Cost of living challenges and the economic headwinds caused by the war in Ukraine are both acting as drags on economic growth. Given that both issues have continued into April, some commentators are predicting this economic slowdown may continue for coming months.

Adegbembo Modupe, Economist at AXA Investment Managers said: “We expect growth to begin to slow materially as the real income squeeze impacts households; some measures point to the worst real income fall on record. It will also hit firms as they deal with rising costs. Both look set to weigh on activity, further impacted by falling confidence, tighter financial conditions and weaker external demand.”

In mainland Europe, a late surge in the popularity of French Presidential candidate Marine La Pen meant that an air of uncertainty surrounds the EU’s second largest economy at the start of Monday. The race between Le Pen and incumbent President Macron is a re-run of the 2017 Presidential election, which Macron ended up winning by a comfortable margin.

Although Macron won the first round of voting, polling suggests the second round could still go either way. A Macron victory would very much be a continuation vote, while a Le Pen win could cause some worries among EU policy makers, creating additional pressure on markets. Unpredictable political cycles are part and parcel of long-term investing. A diversified portfolio and strategic asset allocation can help smooth out some of this volatility and will ultimately drive returns.

BlackRock and TwentyFour Asset Management are fund managers for St. James’s Place.

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