25 November 2021

Into the Winter

Brian Tora provides his insight how the recent social unrest, US renominations and Christmas will impact markets.

Markets have remained relatively quiet as we approach the start of meteorological winter, though the rise in Covid cases in Europe is a concern. The social unrest as protests against further restrictions take place in a number of cities has unsettled investors across the channel, with the Dutch stock exchange particularly hit. It all serves as a reminder that the pandemic is far from over and that the age of tough measures to combat the virus remains with us.

Over in the US, Jerome Powell has been nominated by President Biden to retain his role as head of the Federal Reserve Bank. Praised for his handling of the economy during the coronavirus crisis, Mr Powell is considered a hawk when it comes to monetary policy, so interest rates could move higher to combat the rise in the cost of living. With American inflation up by 6.2% in October, concern is being expressed that the impressive recovery in economic activity could be choked off.

Back home, electrical retailer AO World has warned of product shortages in the run up to Christmas. In particular, games consoles and iPhones are in short supply due to the lack of computer chips, but supply issues could limit the availability of a wider range of goods. It was enough to send their shares lower in early trading after their results. Certainly, this is turning out to be a worldwide problem, with shortages of truck drivers also being cited in the US as creating supply difficulties.

With so much uncertainty continuing, investors must be hoping for the so-called Santa Rally to take markets higher during the festive season.  Quite why shares tend to rise in December is far from clear. Perhaps it is the feel god factor that the festive season engenders. More likely it is professional managers rebalancing their portfolios before the end of the calendar year. And this could involve investing spare cash so that the year end valuations do not look too exposed to a further rally.

At least economic activity remains on an upward path, if the latest set of Purchasing Managers’ Indices are anything to go by. These are reckoned to be as good a forward indicator of economic activity as any, but may well be distorted by the supply issues that are presently so prevalent. But, as in America, we might have to contend with a rise in interest rates in the run-up to Christmas. It is unlikely to be large, though as a signal it could upset sentiment and turn consumers more cautious. Nothing is ever straightforward in this business.

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