And just like that, the much-awaited summer is over. In the UK, as in the rest of the developed world, the mood was a little mixed. While the lifting of restrictions and rapid vaccination programmes seemed to give the public a much-needed boost, the equally rapid spread of the Delta variant caused great concern, and dampened the optimism built up in the spring. The Great British sunshine was notably milder in August than in July, a trend reflected in capital markets. Global equities climbed for a seventh consecutive month, with the MSCI World index posting a 3.6% gain in sterling terms. But this was partly down to currency effects, after sterling dropped in value against its major peers. In US dollar terms, global equities climbed a more modest 2.5%, showing steady if unspectacular returns.
Economic data was strong in the developed world. The restrictions that hampered activity for over a year continued to fade, supporting the strong recovery seen earlier in the year. Non-farm payrolls released at the beginning of the month showed the US economy added 943,000 jobs in July, the strongest figure in 11 months. Wage growth and inflation both strengthened too, adding to widespread reports of labour and supply shortages.
The UK posted similarly strong jobs data, with employment intentions and vacancies at record highs. Europe had a slower opening process than Britain or the US and was therefore behind in growth terms. But August’s data showed businesses are confident and inflation is strong.
These are all positive signs, but they are ultimately backwards looking. More current data – business confidence surveys – showed the global economy coming off the boil. Purchasing managers indices (PMIs) recorded less positive figures in the US and UK, suggesting we have passed peak growth. Europe seems to be at its peak now.
This effectively confirms what investors already knew: the global recovery is strong but no longer improving. The added complication is the spread of the Delta variant, particularly now in emerging markets, where low vaccination rates make many countries vulnerable. When you combine these factors with the recent policy drama in China, investors could be forgiven for being nervous.
Even so, risk appetite was strong in August. All major equity indices posted positive returns in sterling terms, while government bond yields edged slightly higher. The US was once again the standout, with a 4.1% gain for the S&P 500 and a 5.1% gain for the technology-heavy Nasdaq. These results leave the S&P up 20.8% year-to-date, ahead of the 15.1% gain for the MSCI World.
The performance of the US tech giants was particularly impressive. After being the stock market darlings in 2020, high growth expectations pushed investors into smaller companies earlier this year. With growth expectations now waning and investors still eager to buy equities, tech stocks have reaped the benefit.
Growth stocks – and indeed equities more generally – also got a big helping hand from policymakers. US Federal Reserve (Fed) Chair Jerome Powell used his speech at the Jackson Hole conference of central bankers to strike a dovish tone last week. This calmed investors worried about the Fed’s policy intentions. It will continue its extensive asset purchase programme for the foreseeable future, and there is still little sign of tapering any time soon.
The Fed is happy with the data it is seeing, and policymakers still believe the inflation pressures seen this year are transitory. Powell puts the price increases down to temporary factors from the recovery, such as the multitude of global supply bottlenecks. He also emphasised that the Fed’s timeline for winding down its asset purchases is different to that for rate rises. Nevertheless, Fed officials expect the labour market to soon reach a point where it would justify tapering.
This should not necessarily worry investors. Based on our own analysis of equities, credit markets and bond yields, a slight rise in yields would not be so bad. In other words, capital markets can handle a little bit of tapering, so it is no surprise to see Powell suggesting it could happen soon. We will hear more at the Fed’s meeting later this month, where officials will unveil their plans and latest forecasts.
Fiscal policy also proved supportive in August. The US Senate passed a bipartisan infrastructure bill containing $550 billion of new spending – which will now pass to the House of Representatives for further debate. House Democrats are reluctant to support it unless it is attached to Biden’s much larger $3.5 trillion fiscal package. That could prove a hard sell, but the news is still positive. Whatever the case, the US is set to receive a big fiscal investment boost soon. The only question is how big it will be.
Commodity markets were a different story. Despite some impressive gains earlier in the year, the main US oil benchmarks fell in August, while other major commodities similarly struggled. This seems to be down to slowing demand from China and the rapid spread of Delta across the developing world. This could well act against the inflation pressures we have seen throughout the year and may end up being supportive for global growth.
All in all, August had little to surprise capital markets. There are certainly positive signs out there, but a turning over of growth, and the latest twist in the pandemic, could make things difficult for the rest of the year. Markets have upside left to find, but we should be prepared for choppy times ahead.
Asset class returns as at 31st August 2021
The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.
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