Market Outlook – 31st August 2021
Navigating an uneven Economic recovery
The Jackson Hole Economic Policy Symposium took place virtually last week between the 26th and 28th of August. This is an annual gathering of central bankers, policymakers, academics, and economists, where the current status of the world economy is discussed. The content and subsequent meeting notes that come from these discussions and debates can provide a useful pointer to what central bank policy may look like going forward and is therefore worthy of review.
The economic backdrop the meeting took place against is broadly positive but there are areas that are causing policymakers concern if they want to maintain the momentum of the global economy.
The two areas that are a cause for concern at present are inextricably linked and cannot be solved in isolation. The continued spread of the Delta Variant of the Coronavirus continues to impact the normal operation of the global economy. The impact on manufacturing, due to workforce shortages, is slowing the growth in this area. The only way to resolve this issue is by way of a concerted global vaccination programme. As matters stand this is taking place but at differing rates across the world. Until we are all vaccinated Covid will continue to be a disruptive influence in the global economy, albeit with a lessening impact as vaccination takes place.
The second area that is holding back growth at present is a combination of supply chain constraints and the rebound in demand. As manufacturing has been impacted by Covid lockdowns and staff shortages, capacity has been impaired and this is leading to extended lead times to get access to basic materials such as timber, cement and other materials that keep the economies of the world moving. Over time, with higher vaccination rates and open economies, these imbalances will subside, but we are not “out of the woods” with either of these issues at this time.
With reference to this backdrop, the comments from Federal Reserve Chairman Jerome Powell were therefore keenly anticipated, as where goes the USA the rest of the world normally follows. The outcome of the speech indicated that the central bank’s extraordinary efforts to prop up the US economy were likely to remain in place for a while longer. This outcome supports the view that accommodative monetary policy will remain in place for at least 12 months and that’s good news for risk assets such as Equity holdings.
There will be a point where some of the monetary supports will gradually be removed as the global economy normalises, but we are not quite at that point yet. In reality the removal of financial supports is an indication that the economy is strong enough to stand on its own two feet, which should be a cause for celebration not concern.
The stance being adopted by the Federal Reserve in the USA is being reflected in the policy measures being applied by other central banks and this unified approach is supportive of price stability.
Our overall view at present, based on the current economic environment we are navigating, is one where we continue to favour risk assets such as Equities over Bonds and Fixed Interest instruments. We would look towards Multi Asset diversified investment strategies as the most efficient way to participate in the potential being offered within the global economy as the recovery builds momentum subject to the constraints mentioned earlier in this document.
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