Week in the markets: Rapid rebound

The ups and downs of the stock market are rarely symmetrical. Often a rapid fall is followed by a long, grinding recovery. In recent weeks, however, we have enjoyed the reverse - a three-month correction since the summer peak has been followed by a quick-fire three-week recovery. The risks of market timing have never been clearer.

Missing the turn

The S&P 500 has risen by 10% in the past three weeks, up from 4,117 on October 27 to 4,514 last Friday. In doing so it has clawed back almost all of the losses experienced since markets peaked in July. It would have been all too easy to miss the rebound. Investors who had picked up on the gloomier higher-for-longer interest rate narrative since the summer high may well have done just that.

The stretched-elastic rebound in the stock market was given added impetus last week by a renewed downward push in the US inflation rate - from 3.7% to 3.2%. Prices are now rising only a bit faster than the Fed’s 2% target and the view is firming among investors that the US central bank really is now done raising interest rates. The consensus is that rates will start falling again in the middle of next year. Expect more guidance on the future direction when minutes of the Fed’s last meeting are published this week.

It’s the same story on this side of the Atlantic too, with the futures markets now pointing to at least two or three rate cuts by the end of next year following the bigger than expected drop in UK inflation from 6.7% to 4.6%. The FTSE 100 had fallen less than the US market since the summer, but it too has bounced back in the past couple of weeks and now stands at its pre-Covid peak level close to 7,500.

Autumn statement

The markets, though, are not the main focus over here this week, and that’s only partly due to the Thanksgiving holiday which shortens the US trading week effectively to three days.

Politics will take centre stage in the UK as the Chancellor of the Exchequer stands up on Wednesday lunchtime to deliver his Autumn Statement, one of two key fiscal statements each year. Although next spring’s Budget is likely to be the last set-piece announcement before the general election, this week’s statement may be more consequential because any measures announced could have time to take effect before we go to the polls.

This is why speculation is rife about crowd-pleasing changes that could be unveiled on Wednesday lunchtime. Areas of focus include the UK’s complicated ISA regime, where the Chancellor may decide to make it easier for investors to put money to work with more than one provider in each tax year, something that’s not available currently. Less likely is a hike in the £20,000 annual contribution allowance or changes to the Lifetime ISA framework which many young people use as a first step onto the housing ladder.

Other areas to watch are personal taxation, with the freeze on income tax band thresholds (due to run until 2028) up for discussion. And inheritance tax changes are another possible vote winner. Death taxes are always unpopular, for obvious reasons, and the flat 40% rate at which IHT is levied makes this one doubly disliked. 

Coming up this week

Monday - The week begins with inflation data from Germany. There are company results from Compass and Zoom.

Tuesday - The Bank of Canada publishes its inflation figures for October. Across the Atlantic, the UK public sector finance figures are out. A busy day for results with AO World, Baidu, HP, and US chipmaker Nvidia reporting.

Wednesday - The UK Chancellor delivers his highly anticipated Autumn Statement which reveals the tax and spending plans for the year ahead. Company results from soft drink producer Britvic and B&Q owner Kingfisher.

Thursday - The US stock market is closed for Thanksgiving as Americans tuck into their turkey. There are company results from Jet2, FirstGroup and Virgin Money.

Friday - Japan’s latest inflation figures are published. And shopping season is in full swing as Black Friday is celebrated. Following the Thanksgiving holiday, the US market will close early.

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