In a year synonymous with political change, electoral outcomes have had a bearing on capital markets either side of the Atlantic. Midway through 2024, prospects for UK equities were generally positive, if for no other reason than a prospective decline in the risk-free rate of return (though the relationship is indirect, interest rates tend to move in the opposite direction of the stock market, so it’s always a prime consideration). But that earlier optimism, muted though it may have been, has dissipated slightly as the spectre of stagflation has again loomed into view.
The rate cycle and fiscal effects
The Bank of England’s (BoE) latest cycle of rate increases lasted from the end of 2021 through to August 2023, a relatively brief interlude given that the average tightening phase since 1970 stands at 47 months. The consumer price index peaked at 11.1 per cent in October 2022, and in the aftermath of the pandemic, the Monetary Policy Committee (MPC) was faced by an unsettling set of circumstances. Increased debt servicing costs were gradually constraining corporate investment at the same time that inflation was leeching into the system on the back of geopolitical developments and residual stimulus effects.