Welcome to March. If you’ve been scanning the financial pages over the past couple of weeks you will have noticed talk about volatility in the markets and mention around the possibility of rising inflation. Read on to see what’s going on, how to think about the current investing climate and what it means for you and your money.
So, what happened in the markets last month?
- After January's Gamestop phenomenon the company’s shares dropped by 60% in early February and continue to be impacted by day-to-day volatility (similar to shares for other popular meme stock picks).
- Yields on government bonds, which partially reflect investor sentiment on how the economy will do over the long run, rose in February. This led to a global sell-off in the bonds market as the price of bonds fell overall on concern over the possibility or rising inflation and interest rates.
- In the UK, the British pound rallied thanks to the Bank of England’s decision to hold interest rates at 0.1%, and not move into negative territory, and the country’s continued progress on the vaccine roll-out.
- In the US, Joe Biden’s Democratic Party put forward a $1.9 trillion stimulus package which would be the third major spending package the country has rolled out during the global pandemic.
And how are investments performing?
There are lots of positives happening in the world right now influencing investment markets: vaccine roll-outs are underway, many countries are out of national lockdowns and the economy as a whole shows signs of strong recovery and a readiness to return to a new normal. Given the overall positive outlook on economic growth, equities did well in February but the unexpected sharp fall in bonds unnerved markets.
So why did bond markets having a rough go in February? Over the last year central banks globally have used the biggest tools at their disposal - lowering interest rates and injecting huge amounts of cash into the global economy - to keep the economy afloat. This increased the money supply available to people and was a necessary measure. But, now that things appear to be stabilising from the global pandemic, analysts are cautious that inflation will be on the rise - meaning the price of purchasing and selling things will go up. Inflation fears impact the bond market as inflation reduces the value of fixed interest (a promise of return) that bonds provide to investors.
Lastly, what does all this mean for me and my money?
If you are invested in a conservative portfolio, which includes more exposure to bonds over equities, you would have noticed a drop in your returns this month. While it’s never easy to see your returns go down it’s important to remember that short-term volatility is normal. If markets never went down, than investors would never be rewarded for taking on risk when they move up.
There are many factors at play in the market on any given month but the most important thing to take away is that the global bond sell-off we saw in February is actually a positive signal for individual investors like yourself. Why? While there may be some short term volatility, strong economic growth is always good news for investment markets (and your portfolios) over the long run.