Written by Cormac Nevin
US stock markets hit fresh record highs midweek before a hotter-than-expected American inflation report and higher global interest rates cooled things by Friday. Returns for the week remained very strong however; a useful reminder that short-term headlines often have little bearing on long-term returns.
Inflation is simply the pace at which the prices of everyday things rise. Tuesday’s American inflation report showed prices up 3.8% over the past twelve months. That is the fastest pace in nearly three years, and a little higher than economists had been expecting. Energy was the main culprit, with petrol at the American pump up roughly 28% on the year. This matters because when inflation runs hot, central banks become more reluctant to cut interest rates, and that disappointment tends to weigh on share prices in the short term.
In Sterling terms, the S&P 500, a broad measure of 500 of America’s largest companies, finished the week up +2.3% overall, despite Friday’s sharp fall. The technology-heavy Nasdaq added +1.7%, and a broad measure of shares from around the world (the MSCI All Country World Index) rose +1.5%. The UK’s FTSE All Share was the exception, slipping -0.3% as political uncertainty at home weighed. UK Fixed Income markets were particularly challenged by the political turmoil last week, with broad UK bond indices down -1.7%. We think this is illustrative of the strong benefits of global diversification within Fixed Income, which we have implemented since 2018.
Weeks like this are useful for the perspective they provide. The fundamentals of the global economy have not changed in the last seven days. Companies around the world will keep selling things, customers will keep buying them, and over time, that quietly compounds. A bad Friday tends to look much smaller in a year, and barely visible in a decade. The portfolios that hold up best in moments like this are usually the ones spread broadly across many countries, industries and types of assets, so that when one corner of the market wobbles, others can offset it. Patience and diversification have, historically, done most of the heavy lifting.
All performance figures are stated in Sterling terms, unless otherwise specified.
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