The Moneybox Bulletin: February 2023
February brought ups and downs – with market indices posting historic highs, but the cost of living crisis still biting hard. Here’s what it all means.
FTSE 100 reaches 8,000
February was a month of two halves for financial markets. The first half was a continuation of the positive moves that we’ve seen since October last year. Global markets rose as investors saw the risk of recession receding, and in the UK we got the news that economic growth was flat for the last three months of 2022, making a recession less likely.
Indeed in the middle of the month the FTSE 100, the UK’s main market index, climbed above 8,000 points for the first time in its history. The FTSE 100 has outperformed many of its global counterparts over the last year due to the many ‘defensive’ stocks that it includes.
Defensive stocks belong to companies that play an important role in society – like those in the consumer staples, healthcare and utilities sectors. These stocks tend to be less volatile, partly because people will always need food, healthcare and water, even if times are tough.
Central Banks try to strike a balance
It was the same story in the US, where financial markets trended upwards for the first half of the month before falling away in the last two weeks. What happened to reverse the positive course of stocks? Well, economic data got a little too good.
Throughout February we got consistent messages from the UK and US economies that the labour market was still strong, unemployment was low and consumers were still spending. This news coupled with strong company profit reports painted a much rosier picture of things than was expected at the start of the year.
But, this good news has caused a problem – as it may signal further interest rate rises from the Bank of England and the US Federal Reserve. Both Central Banks have been raising interest rates for the last year to try and shackle inflation – which as we know has created a cost of living crisis. It’s a delicate balance for these banks to strike, because pumping interest rates up too high is bad for the economy and stock prices.
So, all the positive economic news we’re getting gives these banks the scope to raise rates further as inflation is still at a historic high in the UK and the US. Higher interest rates are bad for stocks and bonds because people can get high nominal returns – with lower risk – just by leaving their money in a bank account, rather than investing it in the markets.
Good news story
As you know, we generally like to finish our monthly market update with a good news story and a positive twist. So, where’s the good news in all of this? Well the good news is that unemployment is low, a recession is less likely and businesses are still making money. And, while the cost of living crisis continues to bite hard, inflation seems to have peaked and is beginning its descent back to more ‘normal rates’.
While we’re in this strange world of really good economic news being bad for investments and market performance, it’s important to remember that good news is actually good news.
We have the UK Budget coming up on 15th March – followed swiftly by Tax Year End on 5th April. You can learn more about these topics in our upcoming Q&A on 20th March – sign up and submit your questions with the button below!