Driving Economic Prosperity in A Post Pandemic EraMarkets have had a strong run in 2021, notwithstanding a recent pullback as some investors worried about the threat of inflation and higher interest rates as investors grew more confident of a return to some sort of normality following the coronavirus pandemic. The successful rollout of Covid vaccination programmes in Ireland and the UK and in the US under President Joe Biden’s administration, have also buoyed markets. China is the only major market in negative territory.
The S&P 500 is up 19% so far in 2021 and was regularly hitting fresh all-time highs during the summer. The benchmark’s 4.8% decline in September has to be seen in the context of such a strong run. The reopening of economies, strong company earnings and ultra-low interest rates have helped boost investor sentiment. In Europe, markets have also gained, if a little more modestly. The UK’s FTSE 100 is up around 8% in 2021, while the Euro Stoxx 50 has gained 15%.
One measure of the strength of the recovery was that S&P 500 companies’ earnings in the second quarter of 2021 were more than 80% higher than in the corresponding period a year earlier.
More generally, the uplift that technology stocks received during 2020 continued throughout this year, as most employees remained working from home.
Commodities and Inflation
Some more heavyweight sectors, including energy, have also been standout gainers. To some extent, the energy companies were simply tracking oil prices higher.
Gas prices have made a dramatic ascent this year, playing into fears around an inflationary outlook. Soaring energy prices have, indeed, pushed inflation higher, although this has also been stoked by rising wages, arising from staff shortages.
The inflation story is not unique to the Europe – inflation on both sides of the Atlantic has risen. In the UK, the Consumer Price Index (CPI) increased to 3.2% in the year to August, according to the Office for National Statistics (ONS). This was the highest rate since March 2012, with some forecasts indicating that it may yet reach 4%. US core inflation remains at a near 30-year high of 3.6%.
For much of the year, central bankers, including US Federal Reserve chairman Jerome Powell, have called inflation a transitory issue. But Powell has also indicated that the Fed is planning to taper its bond purchasing programme. Interest rate hikes, rising from the current 0-0.25% level, are also on the way next year, say forecasters.
The Bank of England is preparing investors for a rate rise from the current ultra-low level of 0.1% – although not until next year, in all likelihood.
How has this played out in bond markets? Well, bond yields have risen steadily in 2021, pricing in higher inflation and interest rates, but they are not especially high by the standards of recent years. The yield on the US 10-year Treasury note recently stood at 1.6% – this is about twice the level of a year ago but half that of three years ago.
Yet, in the markets, optimism prevails, with many viewing inflation simply as a sign that consumers are spending again after the lifting of months-long lockdowns, during which many households were forced to save.
This year marked the return of dividend pay-outs, after companies cut or cancelled them altogether in 2020. In the second quarter of 2021, dividends from UK companies soared 51.2% to £25.7 billion, according to Link Group, when compared to the same period a year earlier.
Investors also benefited from the higher levels of cash at private equity groups. Private equity firms are offering the highest premiums for listed companies in more than two decades, The Financial Times reported. They are paying almost 70% more than the prior share price in some cases, in a sign of the widening gap between cash-rich buyout groups and public market investors.
While all of this paints a picture of a global economy on the road to recovery, there are certainly issues remaining that could yet derail markets.
One of these is that US lawmakers have passed a short-term deal to extend the country’s debt ceiling until December. This only delays the day of reckoning, although equity markets seem willing to look past such worries for now.
This year could be viewed as a year of two halves – the first half characterised by buoyant markets despite ongoing lockdowns, and inflation fears being considered short lived, and then the second half, during which economies reopened, marred by jittery markets and persistent inflation fears.
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.
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