FTSE 100 edged upwards, but US markets charged ahead

July was another positive month for markets with the FTSE up 2.29% and the US S&P 500 up 2.99%. The FTSE 100 got a boost of around 3% in the middle of July after inflation came in at 7.9%, down from 8.7% for the previous two months.

This puts the FTSE100 up 2% year to date and on top of this investors are getting around 3.68% in dividends at the moment. So in nominal terms (before inflation) the UK market has performed okay in 2023, certainly when you consider all the negative headlines and predictions of a recession, but this performance does not compare well with international markets which we explore further below.

The reason that stocks got such a boost from the latest round of inflation figures is because it’s now hoped the Bank of England can stop or at least slow its interest rate rises sooner rather than later.

UK interest rates have risen rapidly over the last 18 months as the Bank of England tries to control inflation and generally speaking stocks do not perform well in rising interest rate conditions. The hope now is that those conditions may be coming to an end and we may see more stable interest rate conditions going forward but while inflation is down, it’s still a long way above the Bank of England’s target of 2%.

As referenced above, UK investing returns look negligible when we turn our attention across the Atlantic. The US’s S&P 500 is up nearly 20% year to date, and the NASDAQ (which focuses on tech stocks) is up a scarcely believable 35%.

This rally is largely led by seven tech companies, including Meta and Nvidia, which have the lion’s share of the weighting in these indices. There is an ongoing strong debate about how much of a problem the “narrowness” of the stock market performance is, but from an investor’s perspective it represents another reason to potentially use index funds that invest in the whole of the market rather than try and pick a few individual stock winners.

Back on home soil, the interest rate on UK government debt (gilt yields) and interest swap rates which are used to price mortgages have also fallen on the back of inflation figures – and a couple of mortgage providers have actually brought their rates down as a result which is something we have not seen in quite some time and comes as welcome relief to borrowers.

 

US interest rate rise

The US Federal Reserve hiked interest rates by 0.25% in late July, and hinted at another increase later on in 2023. This latest rise meant that rates hit their highest level in 22 years in the US, and it marked the 11th rate increase since the Fed began its war on inflation back in March 2022.

Also in the US, the job market is showing signs of shifting balance. Job openings are down, and resignations have slowed to their pre-pandemic levels. The number of active workers in the 25 to 54 age range is also at its highest level since 2002. The significant thing to note here, is that inflation is cooling without the unemployment rate rising – which is overall good news for the American markets and a sign of a potential “soft landing” i.e. inflation falling without a recession.

 

Outlook for the rest of 2023 

While inflation is trending down and interest rates are expected to max out at a lower number than previously thought – we’re still not back at what might be considered ‘normal’ levels. All eyes now move to the expected Bank of England rate decision on 3rd August, in which a rise of 0.25% is expected. After that, predications look slightly rosier – but by no means are they certain. 

That’s why even with the largely positive market news, it’s important to stick to your plan and not let the large market ups and downs affect your decision making. Remember that investing for the long term is more important than picking investments based on day to day or month to month movements. It’s good to know what is going on, but your investing plan should be specific to you and ignore short term market movements, even the positive ones!

 

Source: Google Finance, 1 July to 31 July 2023