Market Update – June 2022

The difficult stock market conditions experienced since the beginning of 2022 have continued through June, with the FTSE 100 ending the month down 5.44% and the S&P 500 down 5.34%. Even government bonds, normally a ‘safe haven’ in challenging times, have fallen in value. Inflation remains high, and fears of a recession grow.

Although the continuation of the war in Ukraine is an obvious cause of uncertainty at the moment, inflation is arguably a bigger factor and it has forced central banks to adopt and maintain a hawkish approach. At the June meeting of the Bank of England’s Monetary Policy Committee, the Bank Rate was increased by 0.25% to 1.25%, and on the same day the US Federal Reserve hiked its benchmark rate by 0.75% to a range of 1.5%-1.75% – the biggest US increase since 1994. Although the Fed Chairman indicated that moves of this scale were not expected to be common, both were clear that they were committed to doing whatever was necessary to address inflation, even if this meant economic growth would take a hit. The general consensus is that the central banks were too slow to react to rising inflation, and to control it they will now need to act more aggressively to rectify it.

Rising interest rates, or even just perceptions that inflation will be high in the future, have a negative effect on stock valuations because they reduce the present value of companies’ future profits, and share prices adjust lower as a result. This is the case with growth companies like technology stocks, which are a large constituent of global stock markets, but their valuations are often premised on the expectation of big profits many years in the future. The further into the future these profits are expected to be generated, the greater the impact. Bond prices are also hit, as they react inversely to rising yields.

Given that central banks have indicated that they are committed to fighting inflation and will continue to increase interest rates for as long as is necessary, there is little to suggest that there will be a quick recovery any time soon. However, the nature of markets is to look into the future, and valuations take into account the ongoing issue of inflation and the economic outlook. This would suggest that markets are likely to begin to recover as evidence starts to show that inflation is being brought under control.

The upshot to all of this is that stock markets have provided great returns to investors over the long term, even allowing for the cycles and fluctuation that inevitably occur. Therefore, as we always advise, most investors will be best served by reminding themselves of this fact, and by remaining invested with a long term strategy in mind.

If you have any questions arising from the above, please do not hesitate to get in touch with an Integrity365 Independent Financial Adviser today on 0117 450 1300.