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WeekWatch -‘Volatility in the global equity market continued last week’ May 22

WeekWatch -‘Volatility in the global equity market continued last week’ May 22

Volatility in the global equity market continued last week, as consumer confidence and tightening monetary policy continued to slow down growth.

Last week the FTSE 100 finished the week up slightly, after it was revealed the UK’s GDP rose by 0.8% in Q1 2022.

This was slightly below the Bank of England’s forecasts of 0.9%. The trend over the quarter was downward, with 0.7% growth in January, 0% growth in February, and a 0.1% contraction in March.

Economists were generally gloomy about the outlook for the rest of the year in the UK. Modupe Adegbembo, economist at AXA Investment Managers, said: “Growth is likely to remain subdued in the coming months as consumers grapple with rising energy prices and tax increases, which policy is doing little to offset. Savings will play some part in supporting consumption, but there is large uncertainty about where these reserves lie and how they will be used by households.”

George Brown, economist at Schroders, said he expected the economy to contract over the second quarter thanks to capacity constraints, low consumer confidence, the increasing income squeeze and a ‘sharp contraction’ in June on account of the Queen’s Jubilee bank holiday weekend.

Looking beyond the second quarter, he noted: “We suspect the UK will avoid falling into a technical recession (two consecutive quarters of negative growth). Contractions incurred by the Jubilee celebrations in 2002 and 2012 were followed by sharp July rebounds. We think history will repeat itself and ensure that GDP grows over the third quarter as a whole. Beyond this, we think that the economy could head back into reverse in the fourth quarter as the Ofgem price cap rises by a further 40% or so. A key factor will be what additional support the Chancellor provides and whether this comes in the autumn Budget or if he bows to pressure for an emergency fiscal package.”

Inflation data in the UK is due to be released this week, with the headline rate expected to have increased again, this time to 9.1%, its highest rate in over 30 years. Unemployment, which is forecast to have held steady at 3.8% last month and retail sales are also due this week.

In the US, equities continued to fall last week as concerns regarding the economic outlook continued to impact investor sentiment. With the Federal Reserve committed to hiking rates quickly amid spiking inflation, expectations of a soft landing (where an economy shifts from higher growth to lower growth but avoids a recession) for the US have deteriorated. The S&P 500 fell by 2.4%, the sixth consecutive week that it has declined.

The fall came despite relatively strong earnings from companies in the index. According to Capital Economics, of the approximately 90% of companies that have so far reported their results, around three quarters have beaten expectations, and aggregate earnings for companies in the S&P 500 are forecast to grow by roughly 10% in 2022 and 2023.

Rising interest rates are overshadowing positive results and driving the market downturn. “This may mean there is a silver lining for equities,” suggested Thomas Mathews, markets economist at Capital Economics. He said the S&P 500 has often rebounded more quickly when monetary policy is the reason for the fall compared to earnings-driven falls.

There was a brighter picture in the EU, where a strong second half of the week saw the DAX in Germany ultimately closing +2.6%. Overall, the MSCI Europe Ex UK was up 0.57%.

However, these headline rates hide persistent volatility across the continent, as economies grapple with the ramifications of the ongoing war in Ukraine, as well as fears of the effects of China’s zero-Covid strategy.

This all highlights the importance of long-term thinking for investors. While it be uncomfortable to see markets swing up and down, it’s important to remember that reacting to the news cycle can jeopardise your long-term strategy. By remaining invested in a diverse portfolio that is matched to your level of risk and spread across different asset classes, and speaking with your Partner about the volatility, you can navigate the headlines with greater confidence.

AXA Investment Managers and Schroders are fund managers for St. James’s Place.

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