Written by Shane Balkham.
The world of investing has a plethora of adages by which to invest. All of which are based on shaky assumptions, but can also resonate with investors as they seem to have a semblance of truth to them. At this time of year, the adage: “Sell in May and go away” is rolled out, but few will realise that this originated in the 17th century and was about the wealthy migrating out from London in the summer months to their country estates. While out of London and without the use of a smartphone, they were unable to monitor their shares, so selling made perfect sense. Using adages in our experience is not a robust long-term investment strategy.
This year the adage could be used for the intentions of the central banks and the interest rate hiking cycle. Last week saw the Federal Reserve hike rates by 0.25% and signal the end of a continuous series of interest rate rises. The long awaited ‘pause’ has seemingly begun and attention will focus on data to see if inflation continues to fall.
The European Central Bank (ECB) also raised rates by 0.25% last week, but unlike the US, there was no signal suggesting a pause. Having started the process of hiking interest rates much later than the US and the UK, there is an argument that the ECB have much more ground to make up.
However, there is an expectation for the Bank of England to follow the Federal Reserve’s lead this week. A final hike of 0.25% is expected together with a clear signal of a pause in the hiking cycle, despite inflation having so far proved quite sticky. The meeting on Thursday also coincides with the quarterly publication of its Monetary Policy Report, which will provide further detail on the Bank’s forecasts and expectations.
This could be seen as welcome news to the markets, who have been anticipating a pause in the hiking cycle since the beginning of the year. Naturally, the medium-term view will now be dominated by expectations of when the first rate cut will arrive. However, underneath the big picture of central bank decisions, there continues to be ongoing stress in the US banking sector, and fears of economic recessions. Given the uncertainty of the short-term outlook, the need for appropriate portfolio diversification remains crucial.