Can stocks overcome early summer slump?

It’s not been a great start to the warmer summer months, and there are any number of issues threatening the global economy. Here’s what investors should look out for in July.

After a steady first week of June, conditions deteriorated rapidly amid concerns about inflation, interest rate rises and the economy. Before long, stock prices on many overseas markets had plunged to levels not seen since 2020.

Central banks, particularly the US Federal Reserve, have a tightrope to walk between raising borrowing costs enough to bring runaway inflation under control, while at the same time being careful not to tip the economy into recession.

As investors fled for the exit, the broad S&P 500 index fell to its lowest since late 2020 and the Nasdaq tech index sank to its lowest since September 2020, taking its decline since the November 2021 peak to almost 35%.

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American policymakers decided to raise interest rates by more than they have done at any single meeting since 1994 – up 0.75% to a range of 1.5%-1.75%.

Hope is that the Fed will be able to engineer a soft landing, although there’s speculation that another 0.75% hike could be on the cards.

Performance was volatile in the UK too, but the FTSE 100 index has been more resilient than most this year, benefiting from its inclusion of big mining companies and oil majors during a commodities boom. Solid defensive stocks such as tobacco companies have also been a boon.

As such, and despite being down as much as 8% and below 7,000 mid-month, the blue-chip index was down only 3.7% in June as at the close of play on Tuesday the 28th. Only markets in the Far East did better.

On Wall Street, and despite a brief rally, the S&P 500 and Nasdaq Composite are currently down 7.5%, and the Dow Jones is down 6.2%.

What history can tell us about stock markets in July

Bank of England policymakers take a break in July, so there’s no interest rate meeting to keep investors and economists guessing. It’s probably a good thing, too, giving the Monetary Policy Committee time to gauge the impact of a series of increases since December.

However, all eyes will be on the Federal Reserve on 27 July to see whether it repeats June’s trick and adds another 0.75% to rates in an effort to curb inflation.

The European Central Bank (ECB) has already signalled its intention for an interest rate rise at its next meeting on 21 July.

In terms of historic performance, the FTSE All-Share index has risen in nine of the past 13 years, and three of the four monthly losses were by fine margins.

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However, while it can be useful to check the history books for clues, if we have learnt anything from the past few years it is that anything can happen in financial markets, and often does.

There’s still a war raging on mainland Europe and Nato is arming itself to deter further Russian aggression. Supply problems caused by the conflict in Ukraine threaten a global food shortage.

Inflation is expected to decline at some point, but it could be that we haven’t reached the peak yet. Ever higher prices are putting an enormous strain on household budgets, and higher interest rates will filter through to consumers. A cost-of-living crisis is already evident, but will we see a recession this year or in 2023?