Weekly podcast: Market overview
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Market overview – Alan McIntosh, Chief Investment Strategist
August closed out with the US stock market rising for the seventh month in a row (January was a down month). This puts the broad equity index ahead by 20% since the start of 2021. Given that stocks recovered sharply last year after the falls in March, investors are right to ask how much further markets can rise. There are two parts to this. The unprecedented stimulus, both monetary and fiscal, is still largely in place. The US central bank, the Federal Reserve, has started its debate about when to start trimming bond purchases, with most commentators expecting the policy change to happen around the end of the year. Any increase in official borrowing costs however still seems well into the future. Fiscally, some of the COVID support programmes are coming to an end, but there are proposals for further infrastructure and social care packages working their way through Congress. Looking at the rest of the world, the pattern is the same. Monetary and fiscal policy still look accommodative for markets.
The second part of the equation is the rollout of vaccines. After a hesitant start in Europe and to a lesser extent, the US, the proportion of adults being vaccinated continues to rise. This augurs well for a gradual normalisation of economic activity, despite bottlenecks caused by product and labour shortages in certain sectors. Mention must be made however that the rate of vaccination in the developing world remains worryingly low.
Markets have risen a long way from their lows, but corporate earnings momentum continues to be positive as economic recovery broadens out. Abrupt and unexpected changes in official bank policy is what usually upsets markets. In that context, central bankers have tried to signal their intentions in advance to avoid potential disruption. So far, this has proven effective. In the real world, actions speak louder than words. We wait to see whether central bankers will continue to play to this narrative.