WeeklyWatch – Weak market performance due to rising oil costs and potential US government shutdown

3^rd October 2023

Stock Take

Data was referred to as the ‘new oil’ throughout most of the twentieth century. The collection and analysis of data has become the foundation of technology firms’ trillion-dollar operations, while the rise of renewable energy should mean that the days of oil are numbered.

Recent developments, however, have shown that predictions of oil’s doom were highly exaggerated.

Climbing oil prices

One of the biggest drivers of worldwide inflation was the rise in oil prices brought on by Russia’s invasion of Ukraine last year. Prices gradually dropped, but in recent weeks, they’ve started to rise once more.

Last week, the price of oil kept on climbing. Brent crude broke the $97 per barrel barrier in the middle of the week before dropping to $95.41 at the end of the week. Even so, this was an increase of 2.2% on the previous week.

The likelihood that central banks will decrease interest rates in the near future may be diminished as a result of these high prices, which may create more inflationary pressures.

Increasing inflationary pressures

Markets are really fearful of this. A premature dovish move by the Federal Reserve would be ‘unforgivable’ according to Mark Dowding, Chief Investment Officer at Bluebay. He noted:

“If inflation was to re-accelerate, then this would put the Fed in a very difficult position, and it may need to endorse further aggressive tightening in order to restore price stability, with this resulting in a more severe recession were this to be the case.

“Looked at in this context, and with the economy remaining robust, it is easy to understand why the Fed messaging continues to highlight the prospect of one more hike in the coming quarter, with little prospect of lower rates until well into the second half of 2024.”

US stocks face worst month of 2023

While the rise in oil prices helped raise the stocks of energy companies, there were few other winners in the US as the S&P 500 fell for a fourth straight week.

Even though the NASDAQ had a meagre 0.1% increase, this was not enough to save September from becoming the worst month for both indexes in 2023.

Facing the potential US government shutdown

Fears of a US government shutdown, which escalated throughout the course of the week, did not help equities.

Despite the fact that the Republicans currently hold a tenuous majority in the House of Representatives, House leader Kevin McCarthy found it difficult to reach an agreement on funding with his party’s diverse wings.

In the end, Congress was able to approve a short-term budget agreement over the weekend – that will only last 45 days. This might put more pressure on US markets later in the year.

New growth for UK economy

Due to the close ties between the US and European economies, it was only natural that the prospective US government shutdown would have an effect on Europe’s respective indices as well. Overall, the FTSE 100 fell 1.0% and the MSCI Europe ex UK index lost 0.7%.

On the continent, there was some good news as well though. The Office for National Statistics (ONS) in the UK revised its Q1 GDP figures. Previously, it had predicted a 0.1% increase in the UK’s GDP. It now thinks the UK economy expanded by 0.3%.

ONS chief economist Grant Fitzner said:

“Our new estimates indicate a stronger performance for professional and scientific businesses due to improved data sources. Meanwhile, healthcare grew less because of new near real-time information showing the cost of delivering services.”

With the new growth, the UK economy expanded 1.8% between the end of 2019 and the second quarter of 2023, outpacing France and Germany (albeit lagging behind the 6.1% seen in the US). Given the recent general lacklustre economic attitude in the UK, the news will be particularly welcome.

Latest European inflation data

Regarding Europe, the European Central Bank (ECB) published its inflation data for September last week.

Thankfully, European markets continued to show declining inflation. September saw a decrease in headline inflation from August’s 5.2% to 4.3% in September. This was also less than the 4.5% the markets had anticipated.

This is probably the start of an accelerated decrease in eurozone inflation, particularly in core prices, according to Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics. Claus noted:

“It is still early days, but if this rate of disinflation in core goods is sustained, we see scope for significant downgrades in eurozone core inflation forecasts next year.

“Our preliminary updated forecasts point to core inflation next year at 2.2%, 0.3% lower than previous, reflecting lower than anticipated non-energy goods inflation. We could be wrong. Monthly pricing in non-energy goods is notoriously volatile, but at this point the ECB’s 2024 forecast for core inflation at 2.9% is a sitting duck.”

Wealth Check

When it comes to gaining access to your retirement savings, you have more options and flexibility than ever before. But that also means it can be overwhelming to choose which option is best for you.

In order to withdraw funds from your pension plan in the UK, you must have reached a specific age, which is usually 55 years old (and will increase to 57 in 2028). If you’re injured or seriously ill, you might be entitled to withdraw a pension early, although the restrictions will vary depending on your pension scheme.

As you get closer to retirement age, be aware of pension scams. Criminals will approach you more frequently to try to persuade you to withdraw money or make an investment. They could make up information that says you can get your pension before age 55. Remember to always consult your adviser if you ever have any questions.

An annuity is another option. This a product you can buy with your pension funds that will turn your pension pot into an annual pension, providing you with a lifetime of guaranteed income.

Although annuities have lost some of their appeal in recent years, they should still be considered as a retirement planning tool, especially as part of a diversified strategy.

As you get older, rates often get better, so it’s always worth looking for an enhanced annuity to raise your rate even higher.

Alternatively, you might leave your pension as it is. There are no guarantees and your pension investment will continue to be impacted by market volatility. That said, you might be able to boost the growth of your pension assets.

This means that your tax-free cash lump sum and pensions may be worth more when you’re ready. However, if you’re unsure, an adviser can always offer advice about your options and help with planning.

With so many options available, it might be intimidating, but you don’t have to make the decision alone. A financial adviser can explain the key factors to take into account when assessing your retirement benefits and help you figure out what you’ll need.

Additionally, they can help you create a strategy that is unique to you and help you understand any tax implications.

It’s possible that what is best for someone else is not best for you. Speak with an adviser who can help with figuring out the best course of action to meet your needs and produce the best outcome for you and your family.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

In The Picture

Although the S&P 500 had a difficult month in September, research from Bespoke Investment Group has shown that considering the long term can reduce the volatility of the market in the short term. In the stock market, time is money.

Past performance is not indicative of future performance.

Please note it is not possible to invest directly into the S&P 500 and the figures shown do not take into account any charges applicable to the appropriate investment wrapper or any relevant tax charges.

Source: Bespoke Investment Group, July 2023

S&P 500 past performance

The Last Word

“We need to find a formula that doesn’t mean that we’re on a vicious circle of ever-rising taxes.”

– UK Chancellor Jeremy Hunt says the country needs to find a way of improving services without increasing taxes.

Bluebay are a fund manager for St James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP approved 02/10/2023