Navigating by the stars under cloudy skies

Monday 6th November 2023

In our August bulletin we said that data suggested we were nearing the end of the interest rate hikes as inflation was coming under control and falling. Whilst to an extent this has been true, and interest rates not increased since, the fear has been that interest rates will stay higher for longer. It meant Government Bond yields (interest) increased which in turn means their value falls alongside shares, particularly those shares whose value is based on the promise of future profits i.e. growth stocks. Fed chairman Powell's Jackson Hole speech on 25th August concluded with a statement:

"As is often the case, we are navigating by the stars under cloudy skies. At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data."

That data has been robust and the world's economic growth very resilient with the 3rd quarter growth in the US rising by 4.9% fuelled by a 4% increase in consumer spending. These strong results seemed to indicate a very resilient US economy with interest rates potentially rising again. The market interpreted it in the same way with benchmark 10-year US Bond yields, which rise as their price falls, briefly broke through the 5% barrier after investors further focused on Fed chair Jerome Powell's comments in October that the US economy's strength and strong labour market might require higher rates.

However, Company results and their future guidance were not as positive with concerns that the consumer is running out of steam, or perhaps rather their confidence to run down their savings further is falling, as their covid savings finally dwindle.

We see signs of a slowdown in the UK. For example, Rolls Royce making 2,500 redundancies, work we have done recently giving redundancy/retirement advice following a factory closure, and UK net remortgaging approvals fell to 20,600 in September, down from 25,100 in August. This is the lowest level since early 1999, according to data from the Bank of England. Net mortgage approvals for house purchases also fell from 45,400 in August to 43,300 in September. Separate data from Zoopla showed the average UK house price has fallen 1.1% year-to-date to £246,900 as a result of weaker demand and buying power due to high mortgage rates. It's a similar story in the US, all of which indicates the tightening measures are working.

Two leading Bond Managers Bill Ackman and Bill Gross have joined the debate with Bill Ackman saying there was 'too much risk' at the current yields and that the economy was slowing faster than recent data suggested, meaning that bond prices should rise and their yields fall, the opposite of what he had previously predicted.

This was later compounded by Gross's comments that the US economy was 'slowing significantly'. He predicted a US recession in the fourth quarter, adding that he was buying secured overnight financing rate (SOFR) futures, a direct way to bet on the Fed cutting rates. 'Higher for longer is yesterday's mantra,' Gross tweeted. (Source: citywire.com Bills Ackman and Gross do their bit to burst US bond yield bubble).

The decision of all three central banks to keep rates on hold has been welcomed with markets reacting very positively the US Dow Jones by the close of business on Thursday was up 4.4% for the week. This leads to why it is important to stay invested where funds are allocated for the long term. An extract from LGT Wealth Management's recent bulletin highlights the issue:

The issue with trying to time your entry/exit

The pace at which markets react to news means stock prices have already absorbed the impact of new developments and when markets turn, they turn quickly. Those trying to time their entry and exit may actually miss the market bounce. Attempting to predict the future, may mean you could end up being out of the market when it unexpectedly surges upward, potentially missing some of the best performing days. Missing one or two big days, compounded over time, can greatly impact your portfolio.

The graph above illustrates how a hypothetical $100,000 investment in the S&P 500 Index would have been affected by missing the market's top performing days over the 20-year period from 1 January 2002 to 31 December 2021. For example, an individual who remained invested for the entire time-period would have accumulated $616,317, while an investor who missed just five of the top performing days during that period would have accumulated only $389,263.

It's important to note, most of the best days happen around the worst days. Over the last 20 years, 70% of the best 10 days happened within two weeks of the worst 10 days (Source: Factset). If you were to incessantly go in, and out, of the market it would erode returns, alongside having tax implications and transaction costs.

It is true that a broken clock is right twice a day and hindsight is wonderful, but we are not soothsayers. If it was easy to time the market, lots of investors would be doing it and retiring early in the Bahamas, but this is not the case. We must remember that short-term volatility is the price you must pay for the chance of higher long-term returns and let the power of compounding take effect rather than potentially crystallising losses.

The LGT WM comments are very valid for the long term growth of your funds but links to the important aspect of planning and meeting your objectives and holding a diversified portfolio. Of course the huge change since a year ago is to take advantage of high interest rates that for a short period will give a "real return" i.e. greater than inflation, whilst being aware of your tax allowances.

Bailey Cook News

Sarah is doing the Sodbury Slog on Sunday 12 November to raise money for our chosen charity, Centrepoint. The Slog is described as 'a lung-busting, trainer-ruining, hill-climbing, multi-terrain challenge held over and through some of South Gloucestershire's most stunning countryside. Mud is not optional.' Sounds like a lot of fun!

Having broken her shoulder back in February whilst skiing, she had to change her exercise regime as she couldn't lift weights, so she joined Bitton Road Runners in the Spring. She has been very disciplined and trained with them every Tuesday and Thursday as well as Park runs throughout the summer. We wish Sarah the best of luck and if you would like to support her and Centrepoint, please visit our JustGiving page.

As we approach Remembrance Day let us remember those that gave their lives for peace and hope that peace can prevail in this world at such a difficult time.