Investment market update: June 2023

Stubbornly high inflation remained in the headlines in May, causing difficulty for central banks. Discover how stock markets reacted and how it could affect you.

6 mins

Inflationary figures remained higher than expected in many economies in May while economic growth was generally slow. This presented many central banks with a difficult choice, how to control inflation without further stagnating economic growth.

Whilst this article focuses in the main on May 2023 market news, there are references to events and market performance from previous months.

US

The Consumer Prices Index (CPI), one of the key measures of inflation in the US, rose by 0.4% in April to 4.9% year-on-year; this was slightly lower than the estimate¹. The core CPI, excluding food and energy categories, rose by 0.4% for the month, giving an annual rate of 5.5%¹.

In response to the inflation figures, the Federal Reserve chose to raise rates to a target range of 5% to 5.25%, but suggested that their current tightening cycle could be coming to an end².

Gross Domestic Product (GDP) rose by 1.1% year-on-year in Q1, a much lower rate than the anticipated 2%, and far behind the growth seen in Q4 of 2022, which was reported at 2.6%³.

Debates about raising the debt ceiling were ongoing throughout May after the treasury secretary Janet Yellen warned that the US could be at risk of defaulting on loans by 5 June without a new agreement in place⁴. Democrats and Republicans were able to agree a deal to raise the debt ceiling at the very end of the month, although this will also need to pass through Congress⁵.

US equities performance was mixed during May as a result of the uncertainty. The S&P 500 grew by 0.25% for the month, up by 8.86% for the year so far⁶. The Dow Jones did not perform quite so well, falling by 3.49% for the month and falling by 0.72% for the year to date⁷.

UK

Inflation in the UK, as measured by the CPI, fell to 8.7% in April from 10.1% in March, although the rate remained above expectations⁸. This was driven in part by stubbornly high food prices, which remain 19% higher than this time last year⁸.

The figure led to a disappointing slump on the UK stock market amid fears that the Bank of England (BoE) may need to extend their interest rate rises to control inflation⁹. On the day of the announcement, the FTSE 100 index fell by 1.8% while the FTSE 250 fell by 1.4%⁹.

The BoE voted to raise the base rate by 0.25% to 4.5% in May, prior to the announcement of April’s inflationary figures¹⁰. It also amended its projection for the year, suggesting it no longer expects the UK to enter a recession in 2023¹⁰.

Europe

Inflation in the eurozone fell in May – annual headline inflation was recorded at 6.1%, down from 7% in April, while core inflation dropped from 5.6% in April to 5.3% in May¹¹.

The European Central Bank raised rates again as expected, this time to 3.25%, an increase of 0.25%¹². This was slower than previous hikes of 0.5% and 0.75%, which were in response to data suggesting that the eurozone economy isn’t growing in line with expectations¹².

On the stock markets, eurozone data was much weaker than in the first quarter of the year. This was due in part to concerns about the global impact of China’s weak economic data for the month as well as continued uncertainty surrounding the debate over the US debt ceiling¹³.

The STOXX 600 index fell by 3.2% across the month, its sharpest monthly drop of the year so far¹³.

Asia

Chinese economic growth fell short of expectations in April following the end of its strict zero-Covid regulations in Q4 of 2022¹⁴. Industrial production grew by just 5.6% year-on-year, compared to a predicted 10.9%; imports fell by 7.9% while exports rose by 8.5%¹⁴.

The country’s uneven recovery led many foreign investors to sell Chinese shares in May¹⁵. Meanwhile, the MSCI Asia ex-Japan Index fell by 1.8% for the month¹⁶.

In Japan, GDP rose by 1.3% year-on-year in Q1¹⁶. The Japanese stock market also recorded a strong performance: the TOPIX grew by 3.6% across May¹⁷.

What this means for you

May was a somewhat muted month on the global stock markets, partly due to ongoing high inflation for many countries, as well as uncertainty brought about by economic factors such as the US debt ceiling debates.

It can be disappointing if your portfolio doesn’t experience the high level of returns you were hoping for in any given month as a result of the economic climate. But short-term fluctuations in value are part and parcel of investing in global equities and stock markets. What really matters is the long-term potential of your portfolio to enable you to achieve your financial goals. Consider the UK FTSE All-Share as an example; in May 2023, the index fell by 4.6%, but so far in 2023, as a whole, it’s experienced growth of 1.6% ¹⁶.

So, while a month of lower returns than expected might feel concerning, keep in mind that your investments are there for the long term. By staying the course with your portfolio, it may be possible to recover losses or boost growth as markets stabilise.

Please note: This guide is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content of this guide was accurate at the time of writing. While information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may affect the accuracy of the guide.

Sources:

FP2023-239

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