After a heavy sell off in October, stockmarkets recovered strongly in November in response to falling inflation in the US, which led to expectations that the US Federal Reserve would not need to increase interest rates as high as investors had previously anticipated.
Investors remain very nervous about the impact of rising interest rates on a financial system that has become conditioned to 14 years of abnormally low interest rates. By way of example, we saw a brief period of panic in the UK in September when the Bank of England had to intervene in the gilt market to prevent UK pension schemes suffering severe losses. There is a pervading concern that if interest rates have to keep going higher, another part of the global financial system might suffer damage.
As a consequence, any data that points to falling economic growth and correspondingly, falling inflation expectations, is seized on as ‘good’ news by investors. There appears, at least currently, to be an acceptance by investors that a (hopefully shallow) global recession which drives down inflation and means that central banks don’t need to keep increasing interest rates is a good outcome by comparison with continued strong global growth leading to higher inflation and higher interest rates.
However, to the extent that we do see a severe recession as a result of rising interest rates, it is likely that investors will start to worry more about economic fundamentals and the impact of a recessionary environment on the profits of the companies they are invested in, leading to further stockmarket falls.
This article is issued by Portland Financial Management Limited which is regulated by the Financial Conduct Authority. Nothing in this article should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This article may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.