A common saying in the world of investment is that stock markets often climb a wall of worry. This means the market can continue to rise, even against a backdrop of negative news and uncertainty in the economy.
It's because the market is a forward-looking mechanism. It looks through today's negative headlines to the longer-term outlook for the economy.
With earnings season in full swing, markets enjoyed a strong showing last week. The FTSE 100 cemented its best week in months as global markets continued to edge higher, ignoring worries over the large tech players.
5 year FTSE 100 performance
| Jun 2018 - Jun 2019 |
Jun 2019 - Jun 2020 |
Jun 2020 - Jun 2021 |
Jun 2021 - Jun 2022 |
Jun 2022 - Jun 2023 |
|
|---|---|---|---|---|---|
| FTSE 100 | 1.56% | -13.8% | 18.01% | 5.76% | 9.15% |
Past performance isn't a guide to the future. Source: Lipper IM to 30/06/2023.
This week, markets have got off to a more muted start, with expectations for a choppy week as investors prepare to digest a slew of results from the UK's biggest companies, including banks and housebuilders.
Both sectors are seen as bellwethers of the state of the economy, especially around the resilience of the UK consumer.
The bigger question, however, is whether stock markets will continue to rise, or whether last week's rally was a false dawn?
Here are three factors investors should be keeping an eye on over coming weeks.
This article isn't personal advice. If you're not sure whether a course of action is right for you, ask for financial advice. Past performance isn't a guide to the future. All investments can fall as well as rise in value, so you could get back less than you invest.
1. What's next for global inflation?
Despite the market not applauding Tesla or Netflix's earnings reports, it did welcome the news that US inflation, as measured by the headline rate, fell to just 3% in June. This marks the lowest reading for two years and is now only slightly above the Federal Reserve's (Fed) 2% target.
Inflation in the world's largest economy has come down quickly. It's offered investors some hope that the relentless cycle of interest rate rises over the last year and a bit might finally come to a halt.
As the world's most important central bank, the Fed, gears up to hold its policy meeting next week, the question now is where will inflation go next?
While expectations are for a quarter percentage point rise, the better-then-expected inflation number suggests the end of the Fed's ferocious cycle of interest rate hikes is on the horizon.
What about the UK economy?
As we point out in this piece on inflation now versus the 1980s, the UK economy in 2023 looks in far better shape.
Inflation is lower, the number of people in employment is growing and the economy (so far) isn't in recession. While there was a contraction in May, the UK's economic resilience so far has been in sharp contrast to the economic contraction of the early 1980s.
With annual inflation dropping in June, there's finally some good news. There's now a better chance that the BoE can take its foot off the pedal when it comes to base interest rate hikes, meaning there could be some relief for mortgage rates.
UK inflation falls to 7.9% – what it means for interest rates, mortgages, and the economy
2. The beast of the east
While things are looking up across the pond, in the world's second largest economy, China, the picture is far less rosy.
Last week's growth data disappointed with China now firmly in deflation territory.
China has struggled to emerge from COVID-19 lockdowns, with retail sales slowing and the property market struggling. Pressure is mounting on Beijing to stimulate the economy. Investors are taking note and many are polarised on the outlook for the beast of the east.
While some are questioning whether China could be a buying opportunity, other foreign investors are shunning China in favour of other Asian emerging markets.
It's also worth bearing in mind that much like UK households during the lockdown years, Chinese households accumulated a barrage of excess savings. The question is whether these savings could reignite growth.
Is it time to invest in China?
3. How earnings season pans out
With the S&P 500 on a slow but steady recovery since October last year, investors are wondering whether we're heading for a bull market – that's a sustained upward trend in stock prices – or whether this is in fact a bear market rally.
The latter means a raise in stock prices after the plunge into a bear market, but only temporarily before stock prices fall again.
One way of measuring this is whether the market rally broadens out beyond the big-name tech stocks which dominate the index.
The dark clouds of a recession still loom. However, with inflation figures improving and central banks easing on interest rate hikes, there are glimmers of hope that the economic outlook could improve.
As always, for individual investors, valuations and company earnings matter. And that's why it's worth keeping a close eye on this earnings season. Investors are holding their breath ahead of key tech earnings, which among other things, will paint a picture for how advertising demand is shaping up, as well as how the league tables are looking for the AI race.
So far, those companies that have reported have beaten expectations. If this continues, it could give the market a welcome tailwind.
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