Equity markets continued to recover during the week, led by the US (S&P 500 Index) which rose 3.5%. Although the rally in the US has involved all industry sectors, that market is also benefiting from the very high proportion of technology stocks in the index, which has now risen to 25% as investors push prices higher as they seek to gain exposure to an industry that looks well placed to profit from the global move to living online. The scale of this is reflected in the various US indices, with the technology laden NASDAQ 100 some 13.9% higher than it was a year ago, more broadly based S&P 500 2.0% lower and the S&P 400 MidCap Index 20.0% lower. Corporate USA ex-Large Technology is being hit every bit as hard as other nations, including the UK where the FTSE All-Share rose by 2.0% over the week to Tuesday’s close and is 21.4% lower over one year.
When the authorities first launched major stimulus packages a decade ago in response to the global financial crisis it triggered considerable debate among economists over how much inflation would rise as a result. A decade later the press has been revisiting the debate in response to the huge support schemes we are seeing globally to counter the economic damage of the lock down response to COVID-19. Our view is that inflation is not a threat and that excess support causing a modest overshoot on an already low inflation target of 2% is a far better outcome than the alternative, falling into depression. We consider that higher unemployment and reduced economic activity will be met by production capacity that remains high, so there will be no general pressure for prices to rise – though they will for some products and services. The second leg of the argument is that inflation is a symptom of a loss of confidence in paper money and we see no evidence of that in the UK or any other major economy. Overall, we see no reason to be concerned that the scale of the packages will lead to inflation.