Earnings confirm the recovery, but inflation surprises to the upside
The upward momentum in stock markets continued throughout April and early May as hard data and corporate earnings confirmed the economic revival signalled by earlier surveys. In sterling terms, the US, UK, Asia and Europe all rose by over 4%, and emerging markets by 2%, although Japanese shares fell by 2%. Fixed interest bonds were flat. This positive sentiment continued into early May as the release of weaker-than-expected US jobs data perversely pushed shares higher on hopes that interest rates would remain lower for longer.
Global manufacturing hits a ten-year high
The United States posted first-quarter economic growth of an annualised 6.4% as it led the recovery in the developed world. Global manufacturing sentiment hit a 10-year high and 77% of the world's top 1,000 companies that had reported results beat analysts' estimates. Data showed that growth in the Eurozone had contracted in the first quarter, confirming a slip back into a double-dip recession. However, share prices and bond yields rose as traders bet that Europe would soon catch up with its global peers both in terms of the pace of vaccinations and its economic recovery.
April was the month where the base effects from a year ago were expected to lead to a sharp rise in reported inflation, but even so the strength of the US number surprised investors. The annual rise of 4.2%, the highest since 2008, compared to forecasts in the region of 3.6%. German inflation rose by 2.1% and prices in the UK doubled to a still subdued 1.5%.
The Bank of England forecasts the strongest peacetime growth since 1927
The Bank of England's Monetary Policy Committee raised their growth forecast for the year but maintained their stance on not rushing to tighten policy. The MPC forecast a revised growth rate of 7.25% for the year, the strongest peacetime growth rate since 1927. The committee warned that this may be accompanied by a temporary period of modestly above-target CPI inflation, but it expected growth and inflation to fall back, with inflation around the 2% target in two to three years' time.
The US Federal Reserve said that the US was making good progress in the battle against the pandemic but reiterated its view that risks to the economic outlook remained and that they were not yet ready to consider tightening policy. Fed member Clarida confessed to being surprised at the strong inflation data, saying that the Fed would act if price rises proved not to be transitory. He later returned to the party line that now was not the time to start tapering, or reducing the official buying of bonds.
Rogue data in a world emerging from lockdown
Market participants are reliant on economic data to help their market view, covering future earnings, levels of inflation and interest rates, but comparing data from the time of an enforced lockdown to that of a turbo-charged reopening is fraught with problems.
The high-profile April release showing how many more Americans had found employment produced a figure of 266,000 new jobs, which fell well short of the expected 1 million. However, closer analysis showed that the issue was the supply of labour, not the demand. Vacancies were at a 20-year high and companies like Amazon, McDonalds and Burger King had been offering bonus payments to attract prospective employees, in addition to higher wages. One theory over the reluctance of Americans to rejoin the workforce was that unemployment aid proved more rewarding than working, up to a certain level of salary. Other considerations included a lack of available childcare and a fear of returning to crowded workplaces.
The shockingly high inflation number released in early May provided a second example. Expectations were already set at around 3.5% to allow for the base effects of the previous year's energy prices. But no allowance had been made for across-the-board price increases, including a 10% rise in used car prices. The scramble to explain this offered a theory that people remained wary of using public transport and so invested in a car, using their government stimulus cheques. Another view was that car rental firms were rapidly restocking ahead of a bumper summer.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Navigating rogue data as the world reopens
While we work our way out of lockdown and through the distortions of annual base effects, we may see an increase in stock market volatility caused by rogue data. With record levels of global debt and speculative trades made on borrowed money, we noted the comments from Fed governor Brainard, who warned that asset valuations were looking stretched and that a "re-pricing event" could be amplified by high levels of corporate indebtedness.
We feel that short-term interest rates are likely to remain at record lows for some time and we will view setbacks as further investment opportunities. The positive momentum in earnings and economic data supports the case for equities, but the sharp rise in inflation, even if partly driven by base effects, is a reminder that markets will remain sensitive to any signs that price pressures are becoming more persistent.
Weaker-than-expected jobs data perversely pushed shares higher on hopes that interest rates would remain lower for longer.
The Eurozone's double-dip recession is likely to prove short-lived. Traders are already looking through the weak first-quarter numbers and pricing in a catch-up as the region accelerates its vaccination programme. Meanwhile, the robust US recovery and strong corporate earnings continue to underpin global sentiment, even as the debate over when and how the Federal Reserve begins to withdraw its extraordinary stimulus grows louder. The balance between a supportive policy backdrop and rising inflation will be the central tension for markets in the months ahead.
Portfolios were rebalanced last year in anticipation of a more inflationary environment, so no further action has been needed in 2021. We remain diversified across styles, regions and asset classes.
Limited exposure to rising yields
Our fixed interest funds continue to have limited exposure to rising yields, as we feel that current levels do not offer sufficient reward for the potential risk of capital loss.
Gold and silver delivering
The Jupiter Gold and Silver fund gained over 11% during the month. Although they dipped in absolute terms, since the start of the year both our Japanese funds, which are hedged back into sterling, have outperformed the unhedged versions by nearly 9%.
A blend of value and growth
We are holding a mix of value and growth stocks but have sought to minimise exposure to US-listed FAANG names, where valuations have become excessive. Our value stocks have continued to enjoy a strong recovery so far this year.
Alternative assets for diversification
Our portfolios diversify risk by investing in a wide range of assets using actively managed funds with sound investment processes. Some examples of these alternative assets are funds invested in gold and silver, infrastructure, agriculture and absolute return strategies.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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