Sticky inflation, rising interest rates, bank failures, an attempted coup in Russia, the US narrowly avoiding default by a matter of days and an ongoing cost of living crisis. You’d be forgiven for thinking these events have spooked financial markets but the reality has been very different, with markets performing better than even most optimists would probably have expected. Global equity markets advanced over the first half of 2023, heavily led by US tech stocks and the AI boom as Apple became the world’s first $3tn company (who knew the world needed $3,499 goggles?) and Nvidia returned nearly 200% as demand for computer processors surged. It’s periods like this that remind us of the importance of staying invested and sticking to your investment strategy. It would have been easy to have read all the negative headlines of the past 18 months, sold out and waited for the world to stabilise, and subsequently miss the stock market rally we have seen so far in 2023.
The ‘Magnificent Seven’ (Apple, Amazon, Microsoft, Alphabet, Meta, Tesla and Nvidia) as some analysts have called them, have driven the majority of the total gains in the US stock market over the first six months of the year. These seven stocks now make up over a quarter of the total US stock market by market capitalisation and stripping them out completely over the last 5 years reduces investor returns by more than half. Another reminder here that stock picking is extremely difficult and not holding just a few stocks in an index could be the difference between good and mediocre performance.
The good news in financial markets wasn’t just limited to the US. Most developed markets performed well, with Japanese stocks trading at their highest levels since 1990, German and French stock markets recording double digit increases and the broader European index increasing just shy of 9% with encouraging inflation figures towards the end of June, as Spain became the first country to fall below the European Central Bank’s inflation target of 2%.
Closer to home the performance of the UK market was relatively poor, with a comparatively measly 1% return for the FTSE 100. The UK is currently fighting the most persistent inflation problem in the developed world, driven by a tight labour market, stronger than expected wage growth and continued strong consumer demand. In a bid to fight this, the Bank of England continues to increase interest rates, with the base rate at 5% and expected to rise further over the rest of the year (the market is currently pricing in a peak of 6.25%). This has had a profound effect on mortgage rates, with the average 5-year fixed rate now over 6%, which is likely to lead to downward pressure on house prices as those re-fixing and taking out mortgages begin to feel their affordability squeezed.
Economists are split over whether the Bank is doing the right thing by continuing to tighten monetary policy. Although the Bank raised the base rate by 0.5% at its latest Monetary Policy Committee meeting on the 22nd June, it was notable that 2 members voted in favour of keeping the base rate at 4.5%. The logic being that inflation is expected to fall quickly anyway once energy is rebased back to higher levels, and there is a time lag of many months between raising rates and the follow through effect this has on the economy (for example, a lot of mortgaged households aren’t yet affected due to still being fixed at 2% for a few years yet). Time will tell whether the course the Bank is following is correct and whether further rate hikes are necessary. It’s important to remember that although it may not feel like it as we live and work in the UK, the UK makes up a relatively small (and falling) part of global equity markets at just under 4%. The instability in our home market often does not reflect in the performance of our investment portfolio if it is suitably globally diversified, as are the portfolios of most Altor clients.
Whatever the Bank of England decides to do and whatever events the world will throw at us next our advice is the same. Invest for the long term (ideally via globally diversified low-cost index funds), stay invested and worry about the things you can control.
Time in the market, beats timing the market.
Ken Fisher, Founder of Fisher Investments