Growth in the global economy started to slow at the end of last year. The sharp bounce back after the pandemic was tapering off and things were naturally slowing. But this slowdown has since been exacerbated by continued supply constraints – a lag effect of the pandemic made worse by the war in Ukraine – which means central banks, including the Bank of England and the Fed, are now faced with trying to quash demand to try to restore the equilibrium. The way they do that is by raising interest rates, which pushes prices up and demand down.
The question is will they raise interest rates enough to cause a recession? That’s one way to kill off the demand that’s currently outstripping supply and causing so many problems. Or are they going to be able to manage it differently to quash demand and let interest rates come down without one? That’s where the investment community is at the moment – we’re trying to understand which way it will go.
Every time the economy has slowed in the last ten years, central banks have stimulated it. But this time, the central banks have admitted they were a little slow to respond and raise interest rates sufficiently. It’s understandable – they didn’t want to kill off the post-pandemic economic recovery – but then the war in Ukraine broke out and that has further impacted oil and food costs. It’s created a second leg in the post-pandemic inflationary push and forced the central banks and the Fed to move more aggressively than they thought they would. The result? A more significant slowdown in the economy.
When interest rates go up, stock markets go down. In many ways, the recent fall in US stock markets was pretty inevitable. Prior to all this disruption, those stocks were trading on extremely high values, so any impact on global growth was going to have an instant knock-on effect – which it did. In Europe, stock markets haven’t been as badly hit because the valuations aren’t so high; there don’t tend to be as many highly valued tech stocks listed on European markets, which keeps the value of the indexes down overall.
Without a recession, stock markets look like quite good value – especially in the US and, to some extent, Europe too. But the prospect of recession looms large. For now, it seems the Bank of England is more concerned about inflation than it is about growth – mainly because they can see the real-life impact inflation is having on people’s everyday lives.
Remember, food and oil prices are highly cyclical. One summer, you can get a good harvest and suddenly there’s a glut of wheat and corn – and prices drop. There was also a time when people thought oil would stay around $30 a barrel because of over-supply and plenty of talk about moving away from oil for the sake of the planet. But analysts often get this stuff wrong. Oil is currently hovering around $110 a barrel but an economic slowdown and a possible ceasefire in Ukraine would definitely bring that down to around $88 in the next few months. The problem is, no one has any insights at all on the latter, and very few on the former.
A big problem about inflation is it triggers price rises and leaves people with limited disposable income. You can see it in the complete dry-up in demand for assets like new cars – I’m told forecourts were bursting in January and now they’re dead. It’s amazing how quickly economic growth can slow. It also explains why Rishi Sunak is under a lot of pressure to reduce the tax burden and give people back more of their disposable income.
If you’re over 50, it’s likely you’re living off your pension and, to some degree, your capital. Historically, this age group has tended to migrate to the gilt market in order to protect their capital – but that’s not been a possibility over the last decade or so because interest rates have been so low. As a result, many older people have moved into equities (stocks and shares) to try and earn some form of income. Right now, they’re facing a dilemma: do they continue to risk their money in the stock market, or do they move that money into the fixed income market in search of a better yield?
Older people tend to be driven more by income and less by growth. For example, if you’ve been investing in the stock market up until now but see that the gilt market is offering interest rates of 5% in the wake of these inflationary pressures, that might seem like an altogether better prospect – certainly in income terms. If you’re a saver, you can now get a decent return of about 2% on short-dated gilts, which isn’t something you’ve been able to get for about five years.
Ultimately, what people ‘should’ do comes down to personal circumstances. If the investment case for the company remains sound and it’s only being affected by the ebbs and flows of the global economy, then it’s probably not worth selling the shares. But you also need to have enough liquidity to see you through the next year or so – you never want to sell shares when you’re forced to. If you have enough liquidity to maintain your lifestyle – and that of anyone who depends on you – then it’s better to stick with the stock market and not have to sell when it’s at a low.
The rule of thumb used to be you should only ever invest 100 minus your age in the stock market. So, if you’re 62, this would mean 38% of your free capital, the idea essentially being the older you are, the fewer risks you should take and, the younger you are, the more capacity you have for financial risk. But if you can afford to ride out the slowdown and recovery without needing to touch the money you’ve invested, fine. If you think you’ll need it, it might be worth selling and moving that money so you’re not crystalising a loss when a possible recession causes stock markets to fall.
Equities are, by their very nature, volatile, so if that doesn’t feel right or secure enough, it’s worth considering a move. Equally, this age group does have additional cost pressures – whether it be the end of a fixed-term mortgage, supporting children or grandchildren or even things like care costs. So it might be that you don’t feel you can take the risk in the stock market – especially with the possibility of recession on the horizon.
This year, rising prices will be the greatest concern. If you’re not working and living off your pension, then the pain is even greater because there isn’t that potential for a bumper salary rise or bonus. However, people over 50 tend to have more financial flexibility, and therefore can take advantage of the chance to move out of riskier assets and into income-generating assets with higher interest rates attached. If you have plans that involve things like holidays, weddings or anything similar, then you want to make sure you have the liquidity to do all of that. But the overriding message is to think about how you manage your capital – i.e. your savings, pensions – and understanding that the more of it you spend, the less liquidity there might be to give you the financial freedom you’re used to.
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