Making up their minds
Friday 17th June 2022
There is much being said in the financial press about market volatility and the stock markets, so we wanted to try and find an article that was not too deep in technical language, and echoed our own views. The following comment from 7IM, one of the fund managers included within the Montgomery Estate Planning panel, is we feel worth reading.
"As of December 2021, markets thought the Bank of England (BoE) would raise rates to around 1% by the end of 2022. What's striking is that the markets believed, at the time, this would be enough to bring inflation under control, leaving the BoE free to spend 2023 CUTTING rates. Six months into the year, we can see how well that forecast has gone.
On 16 June the BoE hiked above that level to 1.25% but it seems inflation will go higher and last longer than was previously thought. So much so that the markets now expect UK rates to reach 3% by the end of the year. This is not just here either. The market has gone from expecting the Fed to gently increase rates to just above 1% to seeing them sharply raise rates by 0.75% in one go.
Coming into the year, we thought the market's expectations were detached from reality. The recovery from COVID, the strong position of the consumer and a booming housing market was not a recipe for near-zero interest rates. Rates had to rise.
As things stand, the market and central banks look concerned. But that doesn't mean we need to be. Core inflation (excluding energy and food) will come down as the drivers that pushed it up are all waning. But the uncertainty looks to be with us until markets see proof that this is true. This means traditional assets, such as government bonds and equities, will take some time to settle down. Instead, staying positioned for more of the same for the rest of the year, is the right thing to do. Limit exposure to interest rate sensitivity in government bonds and expensive US tech companies.
Until central banks make their minds up, markets are going to struggle to make up theirs. But we've made ours up though - staying diversified in volatile market conditions is the right thing to do."
At Montgomery Estate Planning we would echo these sentiments which is why we have chosen to recommend a selection of well diversified funds that are invested in a range of asset classes to help cushion these shocks, and limit risk for our clients. Of course, none of us like to see our portfolios go down in value, but during such volatile times the old saying of 'time in the market, not timing the market' has never been more relevant.