Written by Millan Chauhan
Last week was a tale of two halves, with the biggest story once again coming from the United States.
For the first few days, American shares pushed higher, supported by confidence in the level of capital expenditure being committed towards the build-out of artificial intelligence and steady company profits. The S&P 500, which tracks 500 of America’s largest companies, set a new record high.
However, the mood changed on Friday. A report showed 172,000 American jobs were created in May, around double what economists had expected, with unemployment steady at 4.3%. Investors took the strong figures badly, seeing the report as evidence that the Federal Reserve have less reason to cut interest rates. The S&P 500 dropped 2.2% on the day and declined by 1.9% last week.
Technology shares fell hardest. The Nasdaq-100, an index weighted towards large technology companies, dropped 4.4% on Friday and declined 3.8% last week. This was exacerbated by Broadcom, a large chip maker, delivering a weaker-than-hoped outlook for its artificial intelligence products. Inflation in the US, as measured by the consumer price index (CPI) is still rising at 3.8% a year, well above the Federal Reserve’s 2% target set by the Federal Reserve, in part because the conflict in the Middle East has pushed up energy costs. With a strong jobs market on top of that, investors now think the US central bank is more likely to raise rates than cut them.
European markets held up better than the US, declining only slightly over the week by 0.8%. Inflation in Europe rose to 3.2% in May, kept high by the same energy costs, and Europe’s central bank is widely expected to raise its main interest rate at its next meeting, making borrowing a little more expensive across the region.
In Japan, shares reached fresh record highs earlier in the week and closed +0.2% higher over the week, though we note the Japanese market had already closed by the time the US sell-off occurred on Friday. Wages, after allowing for inflation, rose for a fourth month in a row, and comments from the head of Japan’s central bank were read as a sign that it may raise interest rates later this month to keep inflation in check.
In the UK, shares fell slightly, with the FTSE 100, the index of the 100 largest companies listed in London, down around 0.4% over the week. With little exposure to technology, the UK market was largely spared from the sell-off of this sector.
A week that swung from record highs to a sharp Friday fall is a reminder of how quickly the mood can change, and how difficult it is to time the markets. For long-term investors, the lesson is not to react to a single eye-catching data point, but to stay invested through periods of uncertainty, which has historically proved far more rewarding than reacting to short-term noise.
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