Neil Birrell, Premier Miton’s Chief Investment Officer, provides a monthly summary of the key events in financial markets.
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Investing involves risk. The value of an investment can go down as well as up which means that you could get back less than you originally invested when you come to sell your investment. The value of your investment might not keep up with any rise in the cost of living.
Premier Miton is unable to provide investment, tax or financial planning advice. We recommend that you discuss any investment decisions with a financial adviser.
- Yes, it really happened; the central banks started arriving at the party.
- The economic data; nothing too hot, nothing too cold.
- Politics reinforces its spot at the top of the agenda.
- A good month for stock markets, or was it?
It happened, it finally happened!
This year, there have been interest rate cuts by central banks around the world, but none of them have been impactful or newsworthy on a global scale, other than the monetary policy actions by the Bank of Japan.
Back in March, the Swiss National Bank made its first cut, but we were left delaying our expectations of the US Federal Reserve (Fed), Bank of England (BoE) and the European Central Bank (ECB) to make the move.
But, that all changed in June. Early in the month Canada was the first of the G7 countries to cut interest rates, closely followed by the European Central Bank and Switzerland. Again, it is a point in time to remember; interest rates are now on their way down.
However, it’s a bring-a-bottle party and the Fed and the BoE decided not join in. It would have been a major surprise if either of them had done so.
The Fed has consistently told us that it would be looking at the data as a guide to when to cut, with the economy and inflation remaining stronger than anticipated, the timing has been pushed back to later in the year.
But, the data is improving now, the Consumer Price Index (CPI) for May was flat compared to April – the first time in nearly two years it didn’t climb, with the core rate at the lowest level since April 2021.
Meanwhile, the Producer Price Index (the Fed’s favoured measure of inflation) also posted better than expected readings. The Fed hasn’t moved yet, but either one or two cuts are likely by the end of year.
US Consumer Price Index
Source: Bloomberg 31.12.2018 – 31.05.2024.
More on the UK later, but the BoE held off cutting rates as well, in what was an erroneous decision in my view. The CPI has got back to the 2% target and the economy, whilst doing better than feared, could do with some support. The next BoE meeting is in August, when a cut is expected, followed by another later in the year.
It’s never a Goldilocks scenario, but you can still eat your porridge
Economic nirvana to an investor is a Goldliocks scenario; not too hot nor too cold. In other words the economy is not so strong that it is in danger of overheating, requiring mitigating action, such as increasing interest rates, and not too slow that recession may be the outcome.
It rarely, if ever, happens and we are a way off that at present. For example, the UK economy is growing, but very slowly, and the US economy is maybe a little too strong for some tastes.
However, things are moving in the right direction, which should be taken as positive by investors.
After bubbling under the surface, politics erupted
In this note last month, I majored on the UK general election, and by the time you read this, the result may well be known. As I write, a big Labour majority does look to be a foregone conclusion, so let’s park it there and review the outcome next month, when we should know more of the new government’s policies.
Meanwhile, in the US, one of the candidates became a convicted felon! It’s difficult to know what to make of that. On the face of it, it doesn’t strike me to be a good thing for his ongoing candidature and possible Presidency, either from a domestic or international perspective.
However, the US legal and political system makes allowance for this, so it will make the run up to the election interesting viewing. We can keep a watching brief for now.
With all the elections around the world this year, I thought the European Parliament one might be amongst the least worthy of comment, an opinion I shared with a journalist a couple of weeks beforehand.
Well, following the big swings to the right and the snap election called in France, she phoned me up to ask if that was still my opinion. That’s the problem with expressing them!
The results were surprising. The action by President Macron more so, which led to considerable uncertainty.
Financial markets react unfavourably to uncertainty, so the fall in stock markets in Europe was not a surprise. Again, a close eye needs to be kept on what happens next, as it will have an impact on markets.
Stock markets good in small parts, less good in most
World stock markets, as determined by the MSCI World Index, the most recognised measure, were higher in June.
That hides what really went on. As noted above, Europe was weak, the UK was down as well, along with Hong Kong and China, whilst Japan was up a little. The US is the dominant world market, so drives the returns of the world market and within that the largest companies drive returns.
The giant US technology companies, along with large and medium-sized ones, drove the US stock market higher. NVIDIA, the leader in the design and manufacture of semiconductors that drive artificial intelligence (AI) briefly overtook Microsoft as the world’s largest company, whilst Amazon joined an elite club, reaching a market capitalisation (total value) of over $2 billion.
This helped drive the well-known and most watched stock market index in the world, the S&P 500 Index, to a new all-time high. This is cause for celebration, but also a good reason to consider; what next? After all, whatever goes up, must… well, not necessarily.
However, there are risks given how high some of these share prices have gone and how influential they are on stock market indices as a result of their size, not just US indices, but the global ones in which they sit as well.
If their share prices fall, they have a big impact on the indices, which effects investor sentiment and other share prices fall as a result. Therefore, it is very important to be in the right regions, sectors and type of company; those that offer attractive long-term opportunities and that might do better in weaker stock market conditions, if that occurs.
There are many such opportunities around, particularly smaller companies globally and the UK more generally. Let’s finish there and pick up on post-election UK next month.
