Potential market correction is a key opportunity for investors
Stock markets will likely fall over the summer, giving investors a key buying opportunity to boost their portfolios.
UK inflation surpassed expectations last month, with consumer prices rising by an annual 8.7%, significantly higher than the Bank of England’s 2% target.
And in the US, Federal Reserve Chair Jerome Powell confirmed that rate hikes should be expected as inflation is “well above” where it should be.
Indeed, Mr Powell stated: “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”
As I was quoted by Newsmax, Mena FN, Value Walk and Investor Ideas, amongst other media, inflation is still high and surprisingly sticky in the majority of major developed economies. This, of course, piles pressure on central banks to continue rate hikes or end the pause in the Federal Reserve’s case.
Elevated borrowing costs weigh on corporate profits as firms could be faced with higher expenses on their existing debt or find it costlier to fund new projects. This usually results in a fall in investor confidence and a drop in stock prices.
Jumps in interest rates can also hinder consumer borrowing and spending. As such, when borrowing costs increase, people may be less likely to acquire new loans for homes, cars or other consumer goods. This reduction in consumer spending can negatively impact businesses’ earnings and profitability, leading to a decline in stock prices.
Furthermore, increasing interest rates boost the attractiveness of fixed-income investments, such as bonds, in relation to stocks. As bond yields rise, investors could reallocate their investments from stocks to bonds, seeking higher returns with less risk.
Consequently, investors should remain prudent as we forecast stock market corrections over the summer.
This would present key buying opportunities for investors to enhance their portfolios with quality stocks at lower entry points.
These investors will be liaising with financial advisors regarding the potential winners and losers from such a fall.
On Wednesday, US stocks were down, with the S&P 500 and the Nasdaq falling around 0.4%, while the Dow Jones lost 0.3%. In the UK, the benchmark FTSE 100 declined to a three-week low.
With the backdrop of sticky-high inflation, those sectors that perform well in a stagflationary environment should also be included in portfolios.
As I’ve said before, these include commodities like oil, as their prices typically rise in response to inflation; consumer staples such as food, and hygiene products, as demand will likely remain comparatively stable; healthcare, as it provides essential services that are less impacted by economic cycles; and utilities, including electricity, gas, and water as demand will also be fairly consistent.
However, as always, investors should remain diversified across asset classes, sectors and regions in order to maximise returns per unit of risk (volatility) incurred.
We predict additional market volatility to intensify this summer, which will be used by investors to boost their portfolios. This can be an incredibly effective strategy, but investors should seek advice from a quality fund manager.