Global stock markets hit their highest levels ever last week
This is a boost for anybody with a pension or other investments such as stocks and shares Isas, as it will have increased the value of their pot.
It also gives investors some respite from record low returns on cash, with still no interest rate hike in sight. However, many will be rightly nervous about putting more money into the stock market at today’s highs, so what does the future hold?
Investors were nervous ahead of the first round of the French presidential elections last Sunday, fearing it could lead to a run-off between hard right National Front leader Marine Le Pen and Marxist Jean-Luc Mélenchon, who have both threatened to exit the euro.
Instead, market friendly Emmanuel Macron looks set to become the next president of France, and traders celebrated by rushing into European stocks, which helped drive up the FTSE 100 as well.
Markets also celebrated news that Britain’s annual budget deficit has fallen to its lowest level in almost a decade, down £20billion to £52billion in 2016/17. This is a sharp drop from its peak of almost £152billion during the financial crisis in 2009/10, as Chancellor Philip Hammond slowly takes control of public sector borrowing.
With the Tories looking set for a crushing majority in the snap election on June 8, Britain should also have strong leadership going into crucial Brexit talks, adding to the sense of confidence around the UK economy.
Market friendly Emmanuel Macron looks set to become the next president of France
Joshua Mahony, market analyst at online spreadbetting group IG, says the pound is rising as Labour leader Jeremy Corbyn’s poll ratings plummet to an all-time low: He said: “Some 61 per cent of voters see Theresa May as the most capable leader, the highest recorded rating ever.”
Trying to time the market and getting it wrong can be very costly
New figures from the CBI showing retail sales growing at the fastest pace since September 2015 added to the good cheer.
Investors were also getting excited by what has been hailed as “the biggest tax cut” in US history, with President Donald Trump preparing to slash corporation tax from 35 per cent to 15 per cent, among other measures.
Animal spirits are rising around the world, with the IMF recently raising its 2017 global growth forecasts to 3.5 per cent as investment, manufacturing and trade rebound. Mahony says global markets are in a buoyant mood: “Despite significant political uncertainty in Europe there is a feeling that the worst is over, with the Trump trade coming back into play thanks to that huge corporate tax cut.”
Yet others remain sceptical. AJ Bell investment director Russ Mould says Trump’s tax cutting plans will further increase the US debt, currently at a record $20 trillion (£15.5 trillion), and could be thwarted by Congress.
He says Trump has little room for manoeuvre: “Interest rates and inflation look to be rising, federal debt stands at record levels and US stocks look relatively expensive after an eight-year bull run.”
Some believe Trump’s tax cutting plans will further increase the US debt
Kathleen Brooks, research director at City Index Direct, says Trump’s tax plan is an economic risk too far and may prove to be unworkable, which would upset investors: “Markets have been banking on a tax cut and, without a big one, could be left disappointed.”
Trump could also sink global trade by introducing protectionist measures to safeguard the US economy, Brooks warns.
In the UK, business confidence is continuing to recover as firms get used to Brexit risks, but consumers are worried about rising inflation, according to the European Commission’s economic sentiment index for April. Europe is not out of the woods either:
Le Pen could still spring a shock in France, while the euro’s underlying problems are no closer to being solved. Finally, worsening tensions between the US and North Korea could also shock confidence.
The summer can be cruel for stock markets, as traders go on holiday and falling investor interest hits share prices.
Hence the adage that investors should “Sell in May and go away, don’t come back till St Leger Day”.
However, analysis from Fidelity International suggests it makes sense to stay invested throughout the summer months. The FTSE All Share has held its own between May and September posting a positive return in 10 of the past 20 years, so there is little reason to panic.
Worsening tensions between the US and North Korea could shock confidence
Fidelity investment director Tom Stevenson says the adage should be taken with a pinch of salt: “Predicting the best time to be in and out of the market is a fool’s errand and trying to time the market and getting it wrong can be very costly.”
Missing even a handful of the best days in the market can hit your long-term returns and you also have to consider the cost of trading and loss of dividends. “Frequent dealing will eat into your returns,” Stevenson says.
If you are likely to need your money in the next two or three years, you should probably avoid heavy exposure to the stock market, but for long-term savings you should stay invested, whatever the summer brings. “Time in the market matters more than timing the market,” he adds.
Markets are finely balanced right now. They could slip from today’s highs, but just as easily fly higher as global confidence continues to grow.