Written by Dominic Williams
Last week was a study in how uneven a sell-off can be. Most markets ended the week lower, but where those falls landed mattered as much as their size.
At home, the bigger story was political. Prime Minister Keir Starmer resigned, with Greater Manchester Mayor Andy Burnham the frontrunner to succeed him, yet markets took it calmly. UK government bonds, known as gilts (loans to the government paying a fixed rate of interest), rallied as their yields fell, driven more by economics than politics: business activity surveys pointed to a second month of mild contraction, and with the Bank of England having held rates at 3.75% in June, the case for further rises eased. The FTSE All Share, a broad measure of the UK market, returned +1.2%.
In the US, the Federal Reserve’s preferred inflation gauge, core personal consumption expenditures (which strips out volatile food and energy prices), rose to 3.4%, its highest in over two years. That reinforced new Fed Chair Kevin Warsh’s firm stance on inflation, and investors now lean towards a rate rise later this year rather than a cut. The S&P 500, a measure of 500 of America’s largest companies, returned -1.6%, while the technology-focused NASDAQ 100 fell -4.0%.
The real drama was in technology and semiconductors. An early sell-off in memory chip makers reversed after Micron, a major US chip maker, beat expectations, only for large technology names to slip again. Japan rode the same wave, the MSCI Japan Index (a broad measure of Japanese shares) ending -2.9%, while South Korea, home to the world’s largest memory chip makers, fell around 10% on Monday before rebounding days later. The MSCI Emerging Markets Index (a broad measure of shares from developing economies) ended -4.2%. Tellingly, though, the falls were concentrated in the largest technology names, while many other parts of the market held up or even rose, so the sell-off was far narrower than the headlines implied.
There was relief elsewhere, at least for most of the week. The oil price fell sharply as the US and Iran moved towards a deal expected to keep crude flowing through the Strait of Hormuz, with the Bloomberg Commodity Index (a broad measure of commodity prices) returning -3.0% in hedged sterling terms. Lower energy costs should ease some pressure on inflation in time, though the truce came under strain over the weekend, so that relief is not yet secure.
Weeks like this present the clearest argument for diversification. A portfolio is not a single index: the areas that fell hardest sat alongside others that held firm, including the UK stock market and the wider bond market, both of which gained over the week. That is what diversification is for, ensuring that when one part of the market struggles, others can cushion the blow. For long-term investors, staying broadly invested remains the most reliable path through periods like this.
All performance figures are stated in Sterling terms, unless otherwise specified.
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