With economic demand outstripping supply, our head of markets discusses the issues moving stocks today.
The rising tide which lifted all boats earlier in the year has now become choppy waters, as inflation concerns rise to the surface.
There is increasing evidence of blockages in the economy as the strength of demand outpaces available supply. Whether this be raw materials or labour, the pressures are clearly inflationary. The question which is currently perplexing investors is whether this is a temporary effect as supply catches up with demand quickly, or whether there are wider factors at play, such as higher prices given the current trend towards deglobalisation, exacerbated by the pandemic.
There is also an increasing debate as to whether the latest Federal Reserve minutes implied that, while any interest rate hike remains a topic for another day, the possibility of tapering current monetary stimulus may be coming to the fore.
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These factors have been enough to put markets on edge, with big tech under pressure as the poster child of growth, and with cyclicals and even defensive stocks looking stronger on the possibility of both economic growth as well as market volatility.
Despite the concerns, for the most part markets have seen the benefit of an emerging global recovery as the threat of Covid-19 generally recedes. In the US, the year to date performances of the major indices show resilient appreciation, with the Dow Jones ahead by 11.8%, the S&P 500 10.6% and the Nasdaq 4.5%.
Prospects for UK Plc
For the UK, an economic bounce resulting from vaccination success is yet to be fully proven, although the recent strength of the retail sales reading could be an indication of the release of the much-vaunted pent-up demand theory beginning in earnest.
As the recovery unfolds, the hospitality and tourism sectors will be hamstrung by some travel restrictions abroad, although domestically the anecdotal evidence of sold-out staycations could propel a return to form.
The warming sentiment towards the UK as an investment destination also seems to be taking hold, particularly since the main indices are still widely viewed as undervalued, which has provided further opportunities to “buy on the dip” on days of market weakness. Indeed, the FTSE 100 has continued its slow grind higher and remains ahead by 9% in the year to date.
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