DIY Investor: Thoughts on the market

Reflecting on August’s inflation figure of 6.7% (a decline of 0.1%), in its latest interest rate decision at the end of September, the Bank of England appears to have (at least temporarily) paused its interest rate hiking cycle – by DIY Investor’s Richard Latter

 
Leaving interest rates unchanged at 5.25% to the relief of many, this ended a period of just under two years where the bank base rate was at 0.1%.

In its next interest rate-setting meeting next week, the markets believe the Bank of England that another pause at 5.25% is the most likely outcome. If this happens, it increases the chance that 5.25% is the peak in this interest rate cycle.

Most leading analysts believe we need to get used to the likelihood that higher interest rates are here to stay for longer. If  true, what does this new reality mean for investors?

In short, it resets expectation about what a good return looks like when you can get numerous deals to put your cash in the bank and get north of 5%. Looking across the Atlantic, the US 10-year Treasury recently hit 5%, before coming back down just below.
 
I like reading John Stepek’s daily Money Distilled email for Bloomberg and I think he recently summed it up nicely:
 
“Put simply, 5% is a big round number. It’s the sort of number we haven’t seen for quite some time, and it’s the sort of number that will have people thinking: “That’s tempting.” It might seem irrational to you that 4.9% is not tempting and 5% is. But you know what? I suspect most of you know exactly what I’m talking about. You’d maybe hesitate at 4.9% — but 5%, as risk-free as you can get? That feels worth a punt.”
 
I’d say that, in a world that seems increasingly volatile, if you can (almost) get 5% a year on an IOU written by the US government it doesn’t feel too much of a punt. But it does also beg the question; why would you accept less on any other investment?

Turning to the UK, for those who are happy to take some extra risk in your investments, there are some big dividend yields to be had, including the following five well known companies:
 

• Above 10% from M&G
• Just under 9% from British American Tobacco
• Just under 8.5% from Aviva
• 8% from Imperial Brands and Glencore

 
With two of the five being tobacco companies, they won’t be for everyone, but it shows that you can still get more than a +3% return on the 5% for cash or bonds right now. Of course, equities might well carry more risk for the investor, but the bond market right now is no mill pond. And does anyone remember a year ago and the Liz and Kwasi show?
 
The continued perceived wisdom is that stocks and bonds have delivered greater returns than cash over the medium to long term. To back this up, staying in the US as of the end of September 2023 the historical average yearly return of the S&P 500 is 9.66% over the last 20 years (assuming dividends are reinvested).

In various aspects of our lives, a lot of us may be a little more ‘glass half empty’ than usual right now. This might be summed up in a single word: volatility – the world seems a volatile place right now be it wars and conflict, the climate or the economy.

Cash is clearly a much safer asset but is it too safe. With ‘timing the market’ being no easy thing, my conclusion for you is to keep the faith as history suggests that you are better to remain invested in stocks and bonds and to ‘stay in the market’.