The bounce in US equities came to an end last week, as investors steeled themselves further interest hikes in the coming days.

Many will be watching closely for clues as to how the Federal Reserve might continue its battle against inflation in the coming months. It dipped recently in the US as energy prices slid but remains at decade-highs: the Fed will be aware that continuing to raise rates quickly could push the US into recession, but failing to control inflation could see prices and the cost of living spiral out of control.

Kristina Hooper, Chief Global Market Strategist at Invesco, suggests that whether the economy goes into recession and whether the stock market rally fizzles will depend on monetary policy. “The Federal Reserve’s preferred measure of inflation is moderating, and initial jobless claims are trending higher. And so given the Fed’s data dependency, I anticipate it will make a pivot to a less hawkish tightening path at some point in the coming months. I believe tightening will continue — but just not as aggressively as markets expect. And I think that should be enough for the US stock market rally to be sustained,” she says.

Despite the S&P 500 and NASDAQ falling 1.21% and 2.62% respectively last week, they remain substantially above their mid-June low point.

The week actually started quite brightly for US equities, with the far-reaching Inflation Reduction Act – which covered areas as diverse as the costs of drugs to corporation taxes – passing through the Senate.

It included $369 billion for investment targeting climate change and energy, including tax credits for electric vehicles, and billions of dollars for the US postal service to buy zero-emission vehicles.

While this bill is clearly supportive of companies in the energy transition sector, Alex Monk, portfolio manager at Schroders, warned that policy is just one driver of energy transition, and investors need to bear in mind that other forces remain relevant.

Monk noted: “We would also stress that remaining disciplined on valuations when assessing companies from an investment is crucial. We think it is important to ensure that we are still investing in the quality businesses, with strong sustainability practices, at sensible valuations.”

The recent up-and-down nature of US equity performance reinforces the need to think long-term when investing. Only looking at the short-term presents an uncertain picture, however over the longer-term, much of the volatility is smoothed out.

While there is uncertainty as to the direction the US central bank will take regarding interest rates, economic data from the UK last week strongly indicated that the UK’s Bank of England will continue its current pace of interest rate rises.

Last week the Office of National Statistics revealed headline CPI inflation rose 10.1% year-on-year in July. This was up from 9.4% and marked a 40-year high. Rising in food prices were the main driver over the month, as they increased on average 2.2%.

Although UK inflation was expected to breach the 10% mark this year, most were not expecting it to happen so soon.

It’s also likely to keep on rising. In October, Ofgem are expected to raise the cap on energy bills substantially, which will again increase inflation.

In the Eurozone, inflation also continued to rise, hitting 8.9% for July. With the war in Ukraine ongoing, the EU is currently bracing itself for a long winter, with high energy costs.

With the EU and UK both facing protracted fights against inflation, the investment landscape has shifted. In recent years, ‘growth’ shares have generally done well. However, many of these are now likely to struggle in a higher inflation environment. According to Alessandro Dicorrado, Head of Value at Ninety One, not all styles are equal. Dicorrado noted that the last three years have not been good for ‘value’ investors, apart from those in the energy and materials space, but that they are poised to do better in the future. “You need stability – even if inflation is higher than usual – if its predictable – value does quite well.”

This also highlights the importance of diversification. Putting all your eggs in one basket might work for a time, but ultimately as market conditions change, different companies will perform better or worse. Investing across styles and assets will help smooth out some of this volatility and help with long-term performance.

It also reinforces the benefit of active management. As markets change, good active managers will be able to pick companies that are likely to benefit from the new environment – for example expanding or adding holdings that are likely to do better in a higher inflationary environment.

Following a recent rise in National Insurance contributions (NICs), some of you may be wondering: ‘What exactly am I contributing to?’ The answer is that the Government puts your money towards:

• paying the State Pension
• paying other benefits such as bereavement allowance
• funding the NHS
• funding social care for the elderly

National Insurance is a tax in all but name. Most workers pay it, including the self-employed, and employers contribute on behalf of their employees.

Why it’s important to pay NICs

Your National Insurance record is what determines the level of State Pension you’ll receive.

To qualify for the full new State Pension, you’ll need to have made National Insurance contributions for 35 years. So, it’s worth checking your NIC record on the gov.uk website. This may be particularly important if you’ve taken a prolonged leave of absence from work or if you’re in part-time or low-paid work, all of which can cause gaps in your record.

You can choose to retrospectively fill any gaps in your record – again, you’ll be given the option to do this on the Government’s website. For those over the age of 66 in the current tax year, a complete NIC record could mean an additional £185.15 in your pocket every week.

A new tax is being introduced in 2023

As of April 2022, employees, employers and the self-employed have been paying an additional 1.25% of their earnings in National Insurance.

In the next tax year, National Insurance rates will return to their previous level and the additional 1.25% will instead be collected as a new Health and Social Care Levy.

This new tax will help fund a care cap: from October 2023, no one in England will pay more than £86,000 for their care over the course of their lifetime. However, this figure only covers the cost of care – it doesn’t include accommodation, food, or utility bills. In reality, people will end up paying more.

A financial adviser can help you manage tax changes and prepare your finances for later life

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

“I did this victory for my country, for all people, militaries who are defending the country. Thank you very, very much.”

Boxing World Heavy Weight Champion Oleksandr Usyk speaking after defending his belts against Anthony Joshua.