With price inflation running presently at 9.4% in the UK, it was no surprise that the Bank of England (BoE) ‘went big’ with their decision to raise interest rates by 0.5%, taking them up to 1.75%.
There was a school of thought which suggested that Bank might even match the 0.75% ‘hike’ implemented by the US Federal Reserve last month. Whilst unlikely to have any immediate impact on prices (which are being driven by essentially international factors), what the latest Bank Monetary Policy Committee decision does solidify is the risk of recession.
The latest forecasts show recession as a likelihood, starting in the final quarter of this year and lasting until the end of 2023 and, while not expected to be as deep as the recession triggered by the global financial crisis in 2008, this next recession could last as long. Recessions are never fun. We can look back at historical data to inform a likely equity market reaction to economic recession and see that stocks have a habit of continuing to rise right into a recession and falling during them. But markets and economies aren’t predictable.
At Pembroke Financial Services, our Investment Committee won’t attempt to time the markets because nobody can achieve this consistently and successfully. Instead, as Financial Planners, we focus on the long-term. We accept that markets go through different stages of the market cycle, and only with the benefit of hindsight can we determine the previous position. It’s also why we value diversification; not placing all of your eggs in one basket (risk-on or risk-off) makes sense when different asset classes behave unpredictably. The Prestige and Better World portfolios have steadied in the last 3 months with the Better World models having the best of the quarter, we suspect largely on the back of a combination of a recovery in technology firms share prices in the US and oil prices falling since June with the knock-on effect on oil company share prices.
That said, it’s natural for investors to worry when recession rears its ugly head. An economic downturn can be a cause for concern. If you’re worried about what the looming recession means for your portfolio, please contact us and speak to your Financial Planner and seek the reassurance you need that this is all a perfectly normal part of the investing journey, even if it can seem a little scary at the time.