Market Overview – 03/08/2021

Most major equity markets produced a positive return in July, the sixth month in a row that share prices rose. This seems quite a feat given the very mixed news flow experienced so far this year. Balancing off the onset of a new Covid-19 variant against the progress of the vaccination programmes, strong GDP growth against an inflation spike and worries about interest rates rising is quite a heady cocktail for markets to absorb. Nevertheless the balance of opinion remains optimistic. We are halfway through the US Q2 company results season and so far, nearly 90% of companies reporting have beaten consensus estimates. Earnings have roughly doubled from a year ago. Outlook statements are also more positive.

Central banks have maintained a fairly consistent narrative in recent months saying that additional improvements in the economy are required before any change in monetary policy is necessary. The recent rise in inflation is deemed to be transitory and should soften as supply chain bottlenecks clear. Bond yields remain low which is supportive of the current levels for equity markets. Time will tell if the central bank approach is the correct one, but memories of the 2008 financial crisis are still alive and well and remind us that premature tightening of economic policy, be it monetary or fiscal, is arguably more damaging than waiting for a sustainable recovery to take hold. This experience is undoubtedly informing the decision makers at present and suggests that any abrupt changes in policy are unlikely for the foreseeable future.