The headlines playing through to financial markets this week were largely US-centric. These started with the reassurance of a government phone call to review progress on phase 1 of the US/China trade deal. This eased concerns following President Trump’s public questioning last week as to whether the two sides would continue to engage in trade negotiations at all. The US stock market responded favourably to this and has grown fairly steadily in comparison to the UK market since the 2020 low. The differing growth is also a reflection of the composition of each market, in other words the types of company that make up both UK and US stock markets.
The second US headline is the stock market has had a positive week reaching new highs. The US market is often described as “tech heavy” reflecting the high number of technology companies compared to the UK. Half of the top ten stocks on the US S&P500 index are tech companies which include Apple, Facebook, Amazon, and Alphabet Inc (formerly Google). The rise of tech is an unavoidable consequence of changing consumer behaviour – who’s reducing their use of technology? In comparison the UK FTSE100 has no tech companies within the top ten which are mainly pharmaceutical, oil & gas, mining and banking. These are often described as cyclical stocks where value is more closely linked to the economic health of the country.
US headline number three came from the US Federal Reserve’s annual policy symposium on Thursday, when the chair of the Fed’ Jerome Powell announced a shift in policy. The nub of this is that interest rate rises will no longer be used to help keep the unemployment rate from falling too far and inflation will be allowed to run slightly higher. The rationale is that the resulting lower interest rates lead to a strong labour market and a strong economy. On balance this is positive news for investors but less so for those in poverty as short-term higher inflation will increase the cost of putting food on the table.
In the UK, retail figures continue to tell a favourable story and many restaurants are reported to be extending a self-funded “eat out to help out” subsidy. This suggests a positive outcome for part of the hospitality sector which is very welcome. A poor wheat harvest was also reported in the UK, which looks set to increase the cost of a loaf of bread and other consumables. In Scotland, the government deficit was described as a black hole, stirring emotion on both sides of the independence debate. As more immediate Covid’ issues take priority, constructive discussion about actually addressing the issue may remain on the backseat.
Many UK companies have stopped paying dividends which has reduced their share price. The value of income portfolios has suffered directly as these typically include shares from dividend paying companies. It is prudent accounting practice in times of uncertainty for companies to hold onto their cash profits but it’s also a PR consideration: companies taking government Furlough cash to pay the wages cannot be simultaneously paying dividends to their shareholders. While there’s a continued media undertone about the anticipated unemployment rise when furlough is withdrawn, the flip side is it may also lead to a return of dividend payment from those companies able to pay them. This will be welcome news but in the post-Furlough world it will be interesting to see when a dividend payment becomes acceptable and at what level.
Have a good weekend.
Regards
Kenny