Investment Insights - Hot Topics August
Welcome to Balance: Wealth Planning's Hot Topics!
Balance: Wealth Planning's August edition of Hot Topics.
Every month, our financial planners will collate the latest 'Hot Topics' within the industry, which we will share with you. The purpose is to update you regularly as these topics are happening and help cover any frequently asked questions.
So, without further ado, please enjoy this edition of Hot Topics!
The Markets
2024 has seen new highs for US markets, with the S&P 500 closing above 5,000 for the first time in February, followed by the Nasdaq hitting a new milestone of 17,000. The Dow is crossing into 40,000 a few months later in May. These Indices have been leaving a trail of record highs throughout the year, raising a widespread dilemma for people. Is this trend of record highs just the start of a more extended period of bullish markets, or is it a sign that markets are due to drop?
Record highs in the news can often spark this dilemma and leave people feeling like they may need to take action. These highs can often be viewed pessimistically, making many people feel they need to get out of the market before an impending drop, especially when cash rates are attractive.
Let's take a look at the chart below, published by Schroders earlier this year. They have simulated what would happen to $100 invested in the US stock market in 1926-2023, comparing if the money was invested the whole time versus moving it to cash every time the market reached a record high and reinvesting it later.
We can see that the buy-and-hold method was almost ten times better than the attempt to avoid potential losses due to being sceptical of these record highs. With so much news being published around the markets, it is easy to miss just how frequently these records are being broken, with an average of 30% of all months since 1926 containing an all-time high.
The Bank of England
Following the Monetary Policy Committee's meeting on August 1st, the Bank of England has agreed to cut interest rates by 0.25% for the first time in 4 years, bringing it down from 5.25% to 5%. This follows inflation returning to the bank's target rate of 2% in May and holding at that rate for June. Despite many people speculating this as a sign that further rate cuts are inbound for the rest of the year, the MPC have cautioned that they are not planning to start making more drastic rate cuts too quickly as it is more important for them to ensure inflation stays at their target level. Inflation levels and MPC's decision to reduce interest rates have sparked further reductions in mortgage rates, with more and more lenders now dropping below 4% for their 5-year fix deals.
Bonds and equities
In the last few years, the usual negative correlation between bonds and equities has strayed towards a more positive relationship between the two markets. Although uncommon, this tends to happen for a few reasons: a negative correlation between economic growth and interest rates, supply-side shocks such as natural disasters and wars, etc., a large difference between inflation and inflation target, and more. In recent months, we have seen the inverse bond/equity correlation begin to return as interest rates return from their historic highs.
Why is a negative correlation beneficial? Having bonds and equities within your portfolio allows your investments to navigate harsher market conditions with much less risk and volatility. With a diversified portfolio including both asset classes, the potential larger losses from equities during periods of low economic growth are often caused by the same factors that will fuel the bond markets to rise and vice versa, thus decreasing the potential for any larger risks. With interest rates on the path to more reasonable levels, we can hope that, in the medium term, the relationship between the two will continue to complement our investments and help them grow with more stability.
If you have any questions regarding the information in this newsletter and what this could mean for your finances, please get in touch.
Please note: This update is not financial advice and is provided for information only. You should not take any action before speaking to a Financial Planner, who will confirm what suits you.
Please feel free to share it with anyone who may be interested. If you have any questions, please get in touch with your usual contact or investments@balancewealth.uk.