There were two main factors driving the financial markets last week. The first was optimism surrounding corporate earnings season: earnings growth for Q2 2021 is an estimated 64% for the S&P 500 Index. The second was pessimism in relation to fears over the rapid spread of the Covid Delta variant. For the UK in particular, this is cause for concern. Today (Monday 19 July) has been dubbed “Freedom Day” and marks the lifting of many of the restrictions that were introduced to halt the spread of the virus. And if lifting these restrictions has even been considered – despite the fast-growing numbers of new Covid cases – it is thanks to the successful rollout of the UK vaccination programme.
Despite the good corporate earnings season figures, the balance was unfortunately tipped by Delta variant concerns. Overall, the markets were down on both sides of the Atlantic. Indeed, they recorded their worst weekly performance in more than a month. The battle that is now raging between new variants and any good news regarding fundamentals is likely to continue for the rest of the summer.
These concerns – countered by reassurances from Fed chair Jerome Powell that the present high rate of inflation in US is transitory – resulted in the 10-year US Treasury bond falling from 1.42% a week ago to 1.31%. On Thursday, US Treasury Secretary Janet Yellen said that she expects the US economy to see several more months of rapid inflation, but that prices will eventually fall back to more normal levels, keeping long-term inflation in check.
But of course, this could have a decidedly negative effect on lower-income home buyers when property prices are soaring. The US consumer price index (which measures the costs of a wide range of items) accelerated to 5.4% in June, hitting a fresh 13-year high. And if you strip out food and energy, the gauge rose 4.5% – the fastest acceleration in 30 years.
In the UK, the rate of inflation has again risen: it currently stands at 2.5% – the highest it has been for nearly three years. While some experts believe that this rise could be a warning sign for the economy, others believe it is simply healthy evidence that the economy is starting to grow again.
Before the pandemic, UK inflation was hovering around at around the 2.0% mark – the Bank of England’s target. But Covid has played havoc with headline inflation, and it is not yet clear whether this recent rise constitutes an actual trend… or a blip. After all, these still cannot be considered “normal times”. The word inflation can strike fear into people’s hearts and into financial markets around the world. But in the UK, inflation rates have scarcely risen above 4% for nearly a decade. What that means is that this month’s rise is nothing to get overly concerned about. Our experience tells us that we should simply keep a watchful eye over future data as it is released.
Another notable development is that the UK unemployment rate has dropped in the last quarter: the gradual easing of Covid restrictions has left businesses and industries free to take on new staff in anticipation of better times ahead. It is therefore imperative that this new Delta variant be contained: a further period of lockdown would be very harmful to the UK economy and to employment rates.
Unfortunately, attempts to contain the spread of the virus have not been successful in Japan: Tokyo’s staging of the Olympics will now be somewhat muted. Rising case numbers have meant that rather than featuring cheering spectators, entertainment and excitement, this year’s Games will be a significantly subdued affair attended by no tourists or spectators – with the exception of the performing athletes’ immediate support teams and the officials presiding.
This is a sad reminder that despite the world’s extensive vaccination programmes, the pandemic is far from over and it is extremely likely that booster doses and seasonal flu jabs will be required as we move into autumn and winter.
The European Commission has just disclosed a comprehensive set of proposals aimed at forcing the European Union to commit to cutting emissions by 55% between now and 2030 (compared with 1990 levels). These proposals cover policies on energy, land use, transport and taxation, as well as ones designed to ensure a socially equitable energy transition. The 2030 target was originally proposed in September 2020 by European Commission President Ursula van der Leyen, raising the EU target from 40%.
Meanwhile, China – the world’s biggest polluter – has just launched the world’s largest carbon trading scheme in an attempt to cut its carbon dioxide emissions. While it is thought that Beijing is doing what the Europeans did for the first phase of the European Trading System – namely treating it as a trial phase during which the rules are relaxed in a bid to get a buy-in from companies – China’s supposed long-term goal is to reach net zero emissions by 2060.
Whether the Covid-19 crisis is nearing its end or not, navigating the financial markets continues to be our overall objective. To this end, we will always endeavour to take advantage of any opportunities that emerge. We live in a society where the pace of innovation is higher than ever. Blue-sky thinking has become key for leveraging the benefits of disruption, innovation and the breakthrough technologies that are now permeating all businesses and sectors.
We do not have all the answers and we certainly do not know what direction inflation will head in the future. Nor do we know when the central banks will withdraw their tapering programmes or indeed when they will start raising interest rates. What we do know, however, is that we have entered a modern day industrial revolution underpinned by innovation. And this is creating numerous exciting investment opportunities. Opportunities to capture the world of tomorrow.
Innovation and sustainability will be the two most important drivers for global growth and change for decades to come. Our job at Investment Quorum is to seek out and differentiate between those drivers that are simply passing fads… and those that constitute enduring breakthrough investment opportunities for the future.
Investing in many of those great companies of today, and more importantly those of the future, will eventually lead to greater success for us and our clients.