Last week US equities experienced another positive period on the back of better-than-expected inflation figures.

For the 12 months to the end of July, inflation stood at 8.5% – still high, but notably down from the 9.1% figure recorded by the US Labor Department for June. Core CPI (which removes food and energy prices due to volatility) was flat, at 5.9%.

Key to the headline fall was a reduction in petrol prices in the US, which receded from record highs to below $5 per gallon.

Buoyed by the news that inflation was down, and the potential that this could mean interest rates rising more slowly than previously feared, markets continued their recent climb.

Over the week, the S&P 500 rose 3.3%, while the more tech-heavy NASDAQ rose 3.1%. This marked the fourth straight week of rises in the US, with both indices up notably from their mid-June lows.

While this will make for encouraging reading, it is important to remember that inflation in the US remains high, and that economic headwinds remain. And so long as these challenges persist, it is unlikely the US Federal Reserve will reverse its current policy of financial tightening.

George Curtis, Portfolio Manager at TwentyFourAM, thinks the latest figures don’t necessarily mean the Fed has won its war on inflation just yet.

“While there is hope once again that inflation has peaked, where inflation ultimately ends up is more important, so we were not surprised to see Fed members come out quickly after the report to temper any overly enthusiastic response from the market,” he said. “Fed members of course have to do this, since a loosening of financial conditions just as inflation starts to roll over is not what they need in their battle to get ahead of the curve and ultimately get inflation down to their 2% target – and in this regard they have a long way to go. We should also remember that markets have previously called the peak for inflation, and that didn’t work out too well.”

Similarly, Mark Dowding, Chief Investment Officer at BlueBay said core inflation was unlikely to fall much below 5% by the end of the year. He added inflation may only return to levels where the Fed can feel more comfortable with the outlook towards the end of 2023. Therefore, he believes it remains premature to be looking for rate cuts too early next year.

These figures also helped European shares rise, with the MSCI Europe ex UK closing the week 1.3% higher. This was despite growing concerns around the economic damage caused by the draught across much of the region.

In the UK, the FTSE 100 and FTSE 250 rose by 0.8% and 1.4% respectively, after preliminary Q2 GDP data showed a slower-than-expected contraction of 0.1%. A fall in output was expected in this period, due to the extra bank holiday to celebrate the Queen’s Platinum Jubilee, so the dip was smaller than many predicted.

Looking ahead, commentators expect a small rebound in growth in Q3 thanks to some of the support measures put in place by the government. However, in Q4, the situation could become more difficult – with the energy price cap again expected to increase notably, potentially seriously hitting household spending just in time for Christmas. As such, the UK could experience a recession by early next year.

With each of the regions facing diverging challenges, and moving at slightly different paces, this highlights the importance of diversifying investments. While the US market might look strongest currently, it has struggled for most of the year. With so much uncertainty, it’s not hard to see the situation changing again, and different markets performing better or worse as time goes on. Over the long term, those who remain invested through market cycles stand to benefit from long-term growth and economic recovery.

Turning to Asia, the Japanese economy expanded in Q2, is now exceeding pre-COVID levels. In this regard it has trailed the US and much of Europe, which all recovered months ago.

However, Martin Hennecke, our Head of Asia Investment Advisory and Communications, notes that this is a good example of why investors need to be careful conflating past economic performance with future potential returns on equity investments.

“Whilst Japan trailed behind the US and some of Europe in reaching this milestone, it doesn’t necessarily imply weaker equity market rebound potential in the country going forwards,” he noted.

Hennecke pointed to relatively low valuations historically coupled with strong earnings, a devalued Yen, and the soon to be implemented Regional Comprehensive Economic Partnership as reasons to be optimistic about the medium to long-term potential for equities in the region.

It’s a risk all business owners should keep in mind during periods of early-stage growth. While ambitious entrepreneurs will always be looking for ways to expand to deal with growing demand, it can be possible for them to overstretch their business – and themselves – before being ready. This is known as premature scaling.

How quickly should a company grow?

When sales start to come in and clients begin queuing up, particularly after two years of struggling through the pandemic, it’s only natural to examine how you can build on your early success to maximise profits.

Yet going too fast, too soon can bring big problems. Overtrading in business is when you accept new work without having the resources to complete it. If you’re stretched too thinly, the quality of the goods or services you provide could suffer, leading to a loss of confidence among existing customers and difficulty in acquiring new ones. If the problems aren’t addressed, it can pose an existential threat to your business.

Ian Duffew, Business Growth Advisor at Elephants Child, highlights some of the key issues you might experience if your business is expanding too quickly:

• Quality issues increase due to over-commitment and additional time pressures, meaning your usually high standards are no longer being met
• Operational cost increases as a result of redoing work and fixing errors
• Customer complaints increase because of under-performance and late delivery
• Planning turns to firefighting as you respond to emerging issues and customer dissatisfaction
• Processes become inefficient because they weren’t set up for this level of volume
• Profit levels decrease as clients question value for money, cancel future orders and refuse to pay for corrective actions
• Team morale suffers due to employees feeling the pressure, negativity and sense of failure
• Repeated mistake This requires a true understanding of the current and future marketplace. Sometimes, an SME might require funding to support that growth, in which case understanding and assessing your financing options can help you make a better decision. In all cases, advice can help
• Occur as a result of being too busy to learn lessons and implement improvements

What are the effects of business growth?

While over-expansion is clearly a risk, not growing at all is possibly even worse. It’s therefore vital to know when to invest in growth and on which part of the business you should focus for maximum impact.

If you’re thinking of growing your business, why not speak to us about the different options available to help you do this? We often work alongside specialist business-growth advisers to assist you in planning for the future, taking into account both your personal and business goals.

“We attribute the issue to the significantly increased level of competition in the food delivery market with both organized chain and ‘mom & pop’ restaurants delivering food.”

Domino’s Italian franchise holder ePizza SpA in its Q4 2021 results, explaining the difficulty the US Pizza chain has endured in Italy since it entered the market. Last week Bloomberg reported the last Domino’s in Italy had closed.