The week that was

The August bank-holiday is usually summer’s last hurrah, and signifies the turning of the seasons.

The four-day week gently introduces us to September, which sees children return to school, autumnal weather, and increasingly darker days.

But this year was far from gentle.

For some, the holiday will have been spent worrying about winter.

On Friday, the UK’s energy regulator Ofgem increased the energy price cap by an eye-watering 80%.

The typical gas and electricity bill will rise to £3,549 a year from October, but those on pre-payment meters or with higher usage can expect to pay much more.

The cost-of-living crisis has become suddenly and painfully acute, with charities warning that one in three households may be unable to pay their bills in the coming months. Some of those on the lowest incomes are expected to face the devastating choice of heating or eating.

The Bank of England are powerless in this scenario, so all eyes are on the government.

Next Monday, either Rishi Sunak or Liz Truss will be announced as the new PM. Their divergent fiscal policies are expected to address the crisis, albeit in different ways and offering varying levels of relief. They may be able to soften the impact of the crisis, but cannot stop it in its tracks.

The energy crisis will also damage the economy. Households will reign in their spending to make ends meet, which will lower company revenues. Businesses are already facing rising energy and supply chain costs, and are likely to have to make similarly difficult choices of their own.

The view from commentators seems clear: the economic outlook is stagflationary at best, and recessionary at worse.

This will weigh on market and investor sentiment over the short and medium-term. Markets will also continue to be influenced by the world’s central banks, who control interest rates.

The US Federal Reserve met once again last week to discuss the future direction and pace of its monetary policy. The Fed committed to remaining hawkish, which means it will continue to increase interest rates.

“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored,” said Fed chair Jerome Powell.

“We will keep at it until we are confident the job is done.”

A selloff in US tech stocks and European and US government debt followed the meeting, reflecting the gloomy outlook for the months ahead.

The bigger picture

Equity markets bounced earlier this month, raising hopes that the picture was brightening for investors.

Unfortunately, the rally has tailed off. The steep drop in US tech stocks at the start and end of last week confirmed that any market optimism rested on shaky foundations.

Across the globe, inflation is rising to highs not seen in decades, economic output is slowing, particularly in China, and a stronger dollar is having a strong negative impact on emerging economies, whose debt is often denominated in the currency.

Cryptocurrency has also experienced a meltdown in the last few weeks, showing a skittishness characteristic of the asset class and betraying an underlying nervousness across its investor base.

We are at the beginning of a new market cycle that is markedly different from those we have experienced in recent times.

Commentators are referring to the new cycle as a ‘regime change’ that carries significant uncertainties and ambiguities. Higher interest rates, elevated inflation, the shift away from globalisation toward regionalisation, and rising labour and commodity costs paint a challenging picture for investors over the medium-term.

The only certainty is further uncertainty: this rough new landscape requires the expertise, agility, and discipline of expert fund managers, who can navigate the changing tides with experience and expert insight under their belts.

The takeaway for investors

The news is reminding us of crises left, right, and centre, which can test our emotional and financial resilience.

In times of flux and pessimism, investing can feel like a challenging task.

There’s no doubt that market volatility and uncertainty will continue over the coming months. It’s therefore important for investors to adjust and manage their expectations around market and fund performance and stick to good behavioural habits.

Speak regularly to your financial advisor if you need to. Whether it’s regarding your circumstances, your investments, or your goals, they’re there to help you stay on track.

The ‘triple-lock’ guarantees that the state pension will rise in line with inflation, average wage growth or 2.5% – whichever is highest.

It was paused in 2022 but is being reinstated in April 2023.

The government will set the annual increase this autumn, and retirees are set for a bumper rise.

Inflation of more than 10% will see the basic state pension rise to more than £155 a week, while those who have reached state pension age since 2016 could see their weekly payments rise beyond £200 a week.

In the current cost-of-living crisis, this is good news for pensioners.

According to Morgan Vine, Head of Policy & Influencing at Independent Age, someone who lives only off the current state pension “would have to spend more than a third of their income on energy alone,” which she argues “is not something older people can simply endure.” The hike should therefore protect those most vulnerable from the worst of the energy price rises.

It will also benefit those who live on the state pension and their own retirement savings.

With the cost-of-living rising, you may need to increase – or have already increased – your withdrawal rate from your retirement pot to maintain your lifestyle or pay your bills. If sustained over time, this could whittle away the size of your retirement pot faster than you had planned – increasing your risk of running out of money. The triple-lock is likely to help provide a bit of a buffer against this.

But with the state pension increase set to surpass average wage growth – and reach a level that the government will not have foreseen when it introduced the policy back in 2010 – the policy may not last forever. There may be a point when it becomes fiscally and politically unsustainable.

Retirees do not need to take any action now, but those planning to retire in the coming decades cannot assume it will continue forever, and must – with the help of financial advice – make sure that their private and workplace pension contributions are helping to generate the lifestyle they want in the future, at a rate that is sustainable in the present.

“The burdens of high inflation fall heaviest on those who are least able to bear them.”

Jerome H. Powell, Chair of the Federal Reserve, on Friday