​Investment Update — February 2022

Equity markets have had a tumultuous start to the year, with the S&P 500 falling by 9% and the Nasdaq falling by 14% at their lowest points. The Nasdaq narrowly avoided its worst ever start to a year by rallying 6.5% over the last two trading days of the month. The recent sharp rise in bond yields provided a catalyst for the sell-off, which was somewhat overdue. At the start of the year the S&P 500 had gone 61 straight weeks without experiencing a fall of more than 6%, the third longest stretch over the past two decades.
With inflation at uncomfortably high levels, central banks have adopted a more hawkish stance in recent months in the hope to stave off uncontrolled inflation. Markets are now pricing in five rate hikes by the Federal Reserve this year and four from the Bank of England. Consequently, bond yields have moved higher in response. History tells us that equity markets often suffer a period of indigestion when bond yields rise suddenly, but that this period of weakness should prove short-lived. In three of the four tightening cycles since 1990, the stock market was higher a year later.

A reason that central banks are raising interest rates is because global economic growth is to remain solid, as long as central banks do not raise rates into economically restrictive territory, the bull market in equities should resume.

As inflationary pressures start to ease and growth begins to moderate; central banks will be less inclined to tighten monetary policy. We believe markets have now priced too many interest rate hikes, as they often do at the start of an interest rate hiking cycle. For instance, the idea that the Bank of England will be able to push through several rate hikes against a backdrop of soaring energy prices and tax rises without causing serious economic damage, seems a little far-fetched.

With global growth above trend and consumer balance sheets in rude health, we believe the recent sell-off is a healthy correction rather than anything more sinister. Valuations of growth stocks have moved lower, but the growth outlook hasn’t, and the acceleration of structural trends will accelerate further. Companies leading profound industry change, and those offering truly differentiated and compelling product offerings and services, will continue to deliver the strongest share price returns over the long term.

Finally, a word on tensions between Russia and Ukraine. Although tensions are rising, any aggressive course of action by Russia would invite sanctions from the West; it is though anticipated that Russia would not retaliate by cutting off oil and gas exports to Europe.

Written by:
Charlie Lloyd
Head of Investment, Skerritts

Please note: These are our views, as always, and don’t constitute advice in any way. The value of investments can fall as well as rise and past performance is not a guide to the future. The content of this publication is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial Adviser.