Recent trends on overseas markets are a great lesson in why your portfolio should be well diversified. Here’s how June turned out and what could be in store for stocks this month.
There were two places you wanted to be invested in June – Japan and a handful of the big American tech stocks. Returns there easily outstripped anything you could have achieved in the UK and mainland Europe. In fact, the UK found itself in the bottom half of the table of major world indices for a second month.
Central banks and the interest rate strategies they use to bring down stubbornly high inflation remain centre stage.
After raising borrowing costs 10 times since March 2022, Federal Reserve policymakers held rates steady at 5%-5.25% last month. Inflation is cooling and, while we’re told to expect two more increases in 2023, investors believe the peak in rates is near. Data also shows the US economy reacting exactly as the Fed would wish, raising the prospect of a soft landing.
Last year’s underachievers are this year’s stars. Tesla (NASDAQ:TSLA) raced 28% higher in June and has more than doubled in 2023 so far, reclaiming a chunk of last year’s 65% decline. Adobe (NASDAQ:ADBE) and Airbnb (NASDAQ:ABNB) both added 17% last month and are up 45% and 50% respectively in 2023.
And Apple (NASDAQ:AAPL) was up over 9% in June, taking gains this year to 49% and the company’s valuation above the magic $3 trillion level.
In the UK, the obvious absence of big technology stocks showed. One of the highest inflation rates anywhere in the word, plus a looming mortgage crisis, also kept a lid on any optimism here. Housebuilders Persimmon (LSE:PSN), Barratt Developments (LSE:BDEV) and Taylor Wimpey (LSE:TW.) all fell 10% or more, miners did badly, while BT Group (LSE:BT.A) and Vodafone Group (LSE:VOD) continued their poor run of form.
The FTSE All-Share index rose 0.7% in June and the FTSE 100 added 1.1%. That compared to 7.4% for the Japanese Nikkei, 6.6% for the Nasdaq Composite and 6.5% for the S&P 500. Even European bourses did better than us, the French Cac climbing over 4% and the German Dax 3%.
Predicting stock market behaviour in July
Biggest event in July for many people will be the kids breaking up for school, marking the start of the summer holiday season. It typically means many market participants switching off the screens or laptop and heading for a well-earned rest.
It’s the same for British central bankers. After a run of interest rates rises since the end of 2021 that took rates from 0.1% to 5%, the Bank of England will pause in July as its Monetary Policy Committee doesn’t meet again until August. Its next decision will be announced on Thursday 3, but current expectation is that rates won’t stop rising until they hit 6%.
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However, there’s no rest for the wicked, and the US Federal Reserve will be discussing policy again in a few weeks’ time. Fed members are tipped to increase rates by a further 25 basis points, despite data suggesting previous hikes are beginning to have the desired effect of bringing inflation down. Current thinking also suggests policy is on track to deliver a soft landing for the economy, avoiding a dreaded recession.
Corporate communications teams will be at full stretch, too, as companies both here and overseas publish latest results. Numbers have already begun trickling out, but you’ll start seeing more of the big ones from mid-month. Domestic UK banks Lloyds Banking Group (LSE:LLOY), NatWest Group (LSE:NWG) and Barclays (LSE:BARC) publish their half-year numbers in the final week of July.
But what might this mean for stock market behaviour?
Since the financial crisis in 2008, the FTSE All-Share has risen in 11 out of 14 years. So, only three down years in that time, and one of those - 2020 - was affected by the pandemic when UK stocks were among the worst performing globally.
Interestingly, according to the UK Stock Market Almanac, the beginning of an average July tends to be strong, with the first week of the month among the top 10 strongest weeks in the year. After then drifting lower, stocks typically finish the month with a flourish.
Given this is another far from typical year, it’ll be interesting to see whether history does repeat itself this time.
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