Are you concerned about inflation rates and how they could affect your portfolio? Good news: both the US and Eurozone saw an overall decrease in inflation rates in March, bringing some relief to consumers and businesses. However, both the European Central Bank (ECB) and the US Federal Reserve (Fed) raised their interest rates to manage inflation and promote sustainable economic growth. Meanwhile, the S&P 500 index shows some interesting developments on the US stock market, highlighting the importance of diversification for your portfolio. Want to know more? Keep reading!
Inflation – some good news
Inflation rates are important for the stock market because they can impact the overall economy, how much companies earn, and investor sentiment. Read this article to get a better understanding of the effects of the inflation rate on your portfolio.
Inflation has been a growing concern in both the United States and the Eurozone in recent months. In March 2023, both regions saw a decrease in their inflation rates, bringing some relief to consumers and businesses.
In the US, the overall year-over-year inflation rate in March was 5%, down from 6% in February. This means that the prices of goods and services, including food and energy, rose by an average of 5% compared to last year. While still higher than the Federal Reserve’s target of 2%, the decrease in the inflation rate is a positive development for the US economy (source).
Similarly, in the Eurozone, the overall year-on-year inflation rate in March was 6.9%, down from 8.5% in February. This means the prices of goods and services, including food and energy, rose by an average of 6.9% compared to last year (source). The decrease in the inflation rate is a positive development for the Eurozone, which has also been grappling with high inflation rates in recent months.
Interest rates – still at a record high
Interest rates affect the cost of borrowing money for companies and individuals, which in turn affects the overall economy and the performance of the stock market. Read this article to get a better understanding of the effects of interest rates on your portfolio.
In March 2023, the US Federal Reserve (Fed) raised the fed funds rate by 25 basis points (bps) to 5%. This means that banks will have to pay higher interest rates to borrow money from the Federal Reserve, which will in turn increase the borrowing costs for individuals and businesses (source).
Meanwhile, in the Eurozone, the European Central Bank (ECB) raised interest rates by 50 bps on 16 March. This means that banks will have to pay a 3.5% interest rate to borrow money from the ECB, which further increases borrowing costs for individuals and businesses (source).
This move by the Fed and ECB is in response to rising inflation rates both in the US and Eurozone, which can negatively impact economies. By raising interest rates, the central banks are trying to manage overly high inflation and promote sustainable economic growth.
S&P 500 – a key benchmark for the US stock market
There are several performance indicators that investors use to evaluate the performance of the stock market. Stock market indexes are an essential tool for investors to evaluate the performance of the stock market. These indexes are designed to track the performance of a group of stocks that represent a particular segment of the market, such as large-cap (companies with a market capitalization value of more than USD 10 billion) or technology stocks. By providing a snapshot of how a particular segment of the market is performing, stock market indexes help investors to make informed investment decisions and assess the overall health of the stock market.
There are several widely used stock market indexes, including the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, among others. These indexes are based on a basket of stocks selected based on various criteria, such as market capitalisation, sector, or geography. As such, they are considered representative of the overall performance of the stock market, and changes in these indexes can provide insight into broader market trends.
S&P 500 – top 8 companies responsible for all share price gains
The S&P 500 index is a measure of the performance of 500 of the largest publicly traded companies in the United States. According to a recent report from Bianco Research (source), a financial research firm, the S&P 500’s year-to-date return can be attributed entirely to just eight companies: Meta (Facebook), Apple, Amazon, Netflix, Alphabet (Google), Microsoft, Nvidia, and Tesla. These companies have collectively gained 4.6% in stock market value in 2023 so far. The index is weighted by the market capitalisation, which refers to how much a company is worth – effectively the size of the company. These eight companies make up almost 25% of the S&P 500 index, which explains the large impact these companies have on the overall market index.
While not all of the remaining 492 companies in the S&P 500 have lost value in the stock market, they are collectively down by -0.99% since the beginning of the year. This is a striking phenomenon that suggests the overall stock market performance is being heavily influenced by a few key players.
So, what does this mean for investors? It highlights the importance of diversification, or the practice of investing in a variety of different stocks, sectors, and asset classes to minimise risk. By investing solely in one type of companies, investors may be missing out on other opportunities and exposing themselves to significant risk if these companies experience a downturn.
However, it is important to note that the comparatively high performance of these eight companies is not necessarily cause for concern. They are all large and influential players in their respective industries and have been driving innovation and growth for years. The stock market is always subject to fluctuations, and it is not uncommon for a few key players to have a large impact on overall performance – at least for some time.
In conclusion, the S&P 500’s year-to-date return has been largely driven by just eight companies, while the other 492 have collectively lost value. This highlights the importance of diversification and the risks associated with investing in just a few companies. However, it is not necessarily cause for concern, and investors should continue to monitor the market and make informed investment decisions based on their individual goals and risk tolerance.
What does this all mean for your Inyova investment?
Your Inyova investment typically moves in line with the US and European markets, and therefore it is normal for your portfolio to experience a downturn when the economy slows down. There’s been some positive signals coming from the markets recently. In March 2023, both the US and the Eurozone saw a decrease in their inflation rates, bringing relief to consumers and businesses.
These developments emphasise the importance of diversification across different sectors, regions, and types of stocks. In addition, investors can aim for timed diversification by regularly adding small amounts to their investment over time. The advantage is that this means stocks will be purchased at a variety of prices. This reduces the risk of buying at a “bad” time based on historical evidence.
As we have mentioned previously, historically every downturn has been followed by an upturn – and the best way to benefit from this is to remain calm and invested. It is important to note, however, that past financial market and instrument performance does not guarantee future performance.
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