After a worse than expected set of inflation figures on Friday showed US CPI inflation hit 8.6% in May, dashing hopes that price rises had peaked, the US market has resumed its downward trend today as concerns mount that the Fed might quicken the pace of interest rate rises.
The Fed is expected to raise rates by 50 bps this week at its 16 June meeting, but there is an outside chance it may go further with a 75 bps hike.
At the time of writing the S&P 500 index is down -21.6% since the start of the year, a slide which officially takes it into “bear market” territory (a decline of 20% or more). Worse still is the performance of the FANG+ index of mega-cap growth stocks – including the likes of Apple, Meta, Amazon, Microsoft and Tesla – which is down -37.5% since the start of the year.
After the ‘all you can drink for free’ party of ultra-low interest rates and massive stimulus programmes which propelled the S&P 500 to an all-time high late last year, in 2022 the hangover has arrived. Investors are now having to sip on a cocktail of concerns. These include rising costs, aggressive monetary tightening, the war in Ukraine and the increasing risks of stagflation – a toxic combination of low growth and high inflation.
In this environment, ‘boring’ stocks with strong balance sheets able to churn out dividends suddenly look a lot more appealing than they have done in recent years and sectors like consumer staples, healthcare and infrastructure should prove defensive.
While the UK equity market has not been immune to the current challenging macro environment, it’s relatively low exposure to growth sectors like technology and communication services – until recently seen as its achilles heel – and high weightings to energy, materials and consumer staples makes it a relatively resilient option for investors in the current climate.
While the UK domestic economic outlook is tough, it should not be forgotten than over 70% of UK equity earnings are made outside of the UK and so UK-listed companies with higher Dollar earnings that report in Sterling should benefit from the currency translation effect.