Market Overview – May 2021

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Market Performance 1st – 31st May 2021 

Equity markets have continued their “wait and see” mode and economic data has been closely scrutinised as the inflation debate rages on. According to the published results of a Bank of America global survey of fund managers, for the first time since February 2020 Covid-19 is no longer the biggest threat to the world economy. Unsurprisingly, inflation has now taken the top spot, with a net 93% of managers forecasting higher inflation over the coming 12 months (the highest percentage of respondents ever recorded). This is of course fairly unsurprising and the two biggest questions facing investors continue to be how far will inflation rise and how long will it be sustained for?

US Data Predictions Prove Wrong:

  • May began with a fairly spectacular miss in the U.S. Non-farm Payroll report for April, with only 266,000 jobs added against expectations for 1 million. Furthermore, the unemployment rate rose to 6.1% against expectations of 5.8%.
  • Perversely, the market reacted favourably to this as the weak jobs report raised expectations for stimulus to continue and eased fears about higher inflation. 
  • Unfortunately, the optimism was short lived after official inflation data showed U.S. consumer prices jumped 0.8% over March, which is the most since 2009 and well ahead of the 0.2% gain expected. 
  • Furthermore, U.S. economic growth continued to accelerate as a rush of consumer spending brought total output almost to its pre-pandemic level. Personal consumption, the biggest part of the economy, surged by an annualised 10.7%, the second-fastest since the 1960s.

UK Economy Marches On:

  • The UK economy continued to rebound, growing by 2.1% in March against expectations of 1.5%. 
  • Companies reported surging demand and data supported that consumers were keen to spend as lockdown measures eased. The Office for National Statistics reported that UK retail sales leapt 5.4% month-on-month in March, against consensus forecasts for an improvement of 1.5%. 
  • UK unemployment rate unexpectedly ticked lower in the first quarter despite the national lockdown. The rate nudged down to 4.8%, from 4.9%, versus expectations for it to be unchanged.

Central Banks Stick to Scripts:

  • The US central bank once again confirmed it was simply not yet time to be talking about hiking interest rates, particularly with the c.8% of Americans still unemployed by the pandemic. The European Central Bank kept its stance unchanged and reiterated its determination to keep borrowing costs low until the Eurozone’s economy was firmly on the path to recovery. 
  • The Bank of England lifted sentiment following their prediction that the UK faces the best year of growth since the Second World War. In line with expectations, it held interest rates at 0.1% and maintained other areas of current support.

Summary:

Whether inflationary pressures prove to be a transitory risk continues to be the key question for markets. Tied closely to this will be expectations on when, or if, central banks will hike interest rates and how long it could take for inflation readings to settle down. Our recent investment changes in the portfolios should go some way to offer investors a degree of protection if inflation does prove to be less transitory. However, the view of the investment managers we speak to feel the broadly positive outlook for the economic recovery still supports the case for a ‘risk on’ investment approach.