Needless to say, in five years, a lot can happen in the world. Think about it, between 2016 and 2021, the UK left the European Union, Donald Trump served one term as the President of the United States, after a hotly contested election Joe Biden returned to the White House but as President, and we saw a global pandemic changing the way we live. In this blog, we reflect on these key events that impacted global markets over the past five years.
The Brexit Saga
Back in June 2016, the UK was asked a simple question: ‘Should the United Kingdom remain a member of the European Union or leave the European Union? With 52% of voters picking for the country to leave the EU1, it marked the start of what, at times, felt like a never-ending saga of Brexit. Both sides struggled to find common ground, for four years and six months, until a Free Trade Agreement (only covering goods) was signed on 24th of December 2020.
So, how did the Brexit Saga affect markets? Well, in the days following the referendum, the pound collapsed and fell to its lowest level since the mid-1980s– the day of the referendum £1 would have bought you $1.49, but after the results were known, it would have only bought $1.372. The key risk of a weakening pound is that it becomes more expensive to import goods and services into the UK, which can then incur higher prices for UK consumers. However, for stock market investors who held overseas assets (investments) it saw the value of their plans rise as sterling’s decline made those foreign assets worth more in pound terms.
Regarding global stock markets, the lasting impact of Brexit was minimal. Immediately following the referendum, investors across the globe became a bit more risk- averse, driving volatility higher on a number of markets. As investors digested the news and realised that the UK leaving the EU was not a concern, market movements became more rational and the impact of Brexit throughout the years was limited to some extent to UK and EU markets.
The Trump Era
Brexit wasn’t the only surprise 2016 had in store for us! About five months later, Donald Trump was elected President of the United States, crushing Hillary Clinton who was viewed as the favourite throughout the race. The shock of Trump’s election was rather short-lived with markets rising sharply after the realisation that a Trump administration combined with a Republican-controlled Congress (think of it as the equivalent of the Parliament in the UK) would bring an era of business-friendly policies, such as tax cuts and regulatory easing for US companies.
But the Trump Era wasn’t all perfect for markets and investors. The first hurdle started in 2017 when frictions between the US and China emerged. As, after the election, Trump quickly denounced China’s trading practices and threatened to impose hefty tariffs on American imports of Chinese goods. China responded that they would do the same, and naturally, tensions escalated. After months of negotiations, both countries ended up imposing substantial tariffs on one another’s goods. In May 2019, the US targeted Chinese imports with a 25% duty (tax) and a month later, China hit back with similar tariffs on US goods3. The trade war between the US and China understandably made investors nervous and sent significant, periodic shock waves across global markets. And whilst little improvement was seen in US-China relations, markets managed to shine through – mainly because the US economy showed sustained strength.
The Trump Era was also marked by fears around US interest rates rising too much. At the end of 2018, the US economy showed some signs of slowing, but the Federal Reserve, the central bank of the US which sets interests rates, lifted policy rates to their highest level since 2008. This hit investor sentiment and stock markets plunged – with the S&P 500, the main US market, falling by 13.5% in December 20184. The storm didn’t last long though, as the US economy proved resilient throughout 2019 and the Federal Reserve moved its expectation of the next interest rate hike to be at the earliest 2020. In fact, in July 2019, they even cut interest rates – the first time since 2008! This decision was of course welcomed by markets and helped boost the economy by making the cost of borrowing cheaper, in turn encouraging people and businesses to spend more.
The Bitcoin Craze
Between 2016 and 2021, the investment world went through a series of events that has had an impact on both the industry as whole and investors. But perhaps the biggest investment story of the last five years is the Bitcoin craze. Put very simply, Bitcoin is a virtual currency that is created by “mining” (albeit virtual mining). It only exists online and isn’t regulated by any central authority, government, or other sovereign powers (i.e., decentralised).
And although it is accepted as payment by some companies, technically, it doesn’t really work like traditional currencies, such as the pound. In fact, it’s been mainly used as an investment vehicle and its value has been very volatile. On 17th of December 2017, Bitcoin experienced its first spike as its value reached $20,089. But a year later, the cryptocurrency was only worth $3,545.865. Fast forward to April 2021, and Bitcoin has exceeded $58,0005. Nobody can predict the future or knows where Bitcoin is heading next. But if anything, past performance, although not a reliable indicator of future results, shows us that the cryptocurrencies can experience sharp ups and downs, which isn’t for the faint-hearted.
The US Elections
In November 2020, Americans went back to polling stations to elect their 46th President. This time the choice was between Joe Biden, Democrat who served as Vice-President for President Obama, and the incumbent President Trump. Seats at the Congress, including the House of Representatives and the Senate, were also for grabs – needless to say, the world was watching! It took days before the results were made official as polling stations in several states had to recount. But in January 2021, President Joe Biden was sworn into office, and Kamala Harris became Vice-President. At a Congress level, the House of Representatives remained with the Democrats, and the Senate ended up with a tie, but since the Vice-President decides tied Senate votes, the Democrats effectively gained control of Congress.
Markets were worried about a ‘Blue Wave’ that would have seen Democrats with a larger majority, but this didn’t happen, which was perceived as good news for businesses and investors who tend to worry about higher taxes and an increase in regulations – measures that Democrats are more likely to consider. With such a slim majority, it becomes more difficult for them to make drastic changes, and, as a result, markets didn’t react much to the elections as they favour a lower uncertainty environment as expected from the Biden administration. There is now hope for better trade relations with China, although this remains to be seen.
The Global Pandemic
2016 was an eventful year, but that was before 2020 arrived and stole the title for ‘we were not expecting this at all’! At the end of 2019, a new virus emerged in China and at this time, much of the world didn’t really appreciate the impact it would have on our lives. Covid-19 rapidly spread across the globe in 2020, and millions of people lost their lives to this deadly virus. Faced with high hospitalisation and mortality rates, governments across all continents decided to shut down non-essential economic activity to limit the spread and save lives. Shops and restaurants closed, flights were grounded, and people were asked to stay home – this marked the start of a series of lockdowns, which forced economies to slow down. For instance, the UK GDP (Gross Domestic Product – which measures the value of goods and services a country sells) contracted by 9.9% in 2020, which is more than twice that seen in 2009 during the Global Financial crisis6. This was no ordinary recession, with growth declining -3.0% in the first quarter of 2020 (the first three months of 2020), -18.8% in the second quarter of-2020 before recovering 16.0% and 1.0% in the third and fourth quarter of 20206.
Needless to say, global markets were seriously hit by the pandemic. Between January and March 2020, the FTSE 100 lost 33.8% of its value and on 23rd March the UK market collapsed to 4,993.9 points, one of its largest declines in history7. Similarly, on 12th March, the S&P 500 in the US dropped by 9.5%, its largest one-day fall since Black Monday in 19878. But the panic didn’t last long, and markets started bouncing back as soon as governments announced significant fiscal support measures, along with central banks announcing exceptional measures to lessen the impact of the pandemic on the economy. Interest rates were cut drastically to encourage consumption and investment. Schemes paying a proportion of worker’s wages were introduced, and business support loans were given. Across the world, governments showed that they were willing to do pretty much whatever it takes to support both businesses and consumers, which reassured investors.
But what really helped markets is the prospect of a real recovery, as many drug companies such as Moderna, AstraZeneca, Pfizer and BioNTech announced successful Covid-19 vaccine trials at the end of 2020. Markets surged at the excellent news and continued their ascension until the start of 2021, despite a rising number of cases in the world.
So, where are we now? Well, there’s still hope as millions of people are getting vaccinated, but there’s also been more caution, especially as many countries, notably in Europe and Africa, are struggling to secure sufficient vaccine doses and get their population to adhere to their vaccination programme. There are also some concerns about the post-Covid world and the potential risk for high inflation (where prices increase during a specific period), followed by a rise in interest rates, but governments have shown a strong willingness not to interrupt the recovery while the path ahead remains quite uncertain.
What about the next five years?
Nobody can predict the future – not even us! However, our highly experienced Investment Team are preparing for any scenario, including the unexpected. We’re expecting that the pandemic and the re-opening of business activity will impact the markets and the economy. We’re also paying attention to the US and Biden’s policies, as they will likely affect market movements. In the next year or two, there’s a number of political events we will be watching closely, such as the German elections (2021 with Chancellor Merkel not standing for re-election) and French presidential elections (2022). There are the US mid-term elections (2022), as well as the Scottish Parliamentary elections (2021) which will no doubt see further discussion around independence. There’s also the post-Brexit relationship which still needs to blossom between the UK and the EU.
Whatever happens, our Investment Team are ready to act in your best interests. At Wealthify, we build your portfolio with the knowledge that there will be good and bad times, and we are always prepared to make changes to your Plans, if needed, to protect your money from the storms. Our aim is to make sure your investments take full advantage of the good days and are sheltered from the bad. If you want to read more about our investment strategy, head to our how we invest page, and if you have any questions about your Plan or investing in general, don’t hesitate to contact us on 0800 802 1800 or via Live Chat.
References:
1: https://www.bbc.co.uk/news/politics/eu_referendum/results
2: https://www.finder.com/uk/brexit-pound
3: https://www.bbc.com/news/business-45899310
4: Quarterly markets review - Q4 2018 - Schroders global - Schroders
6: Data from Bloomberg
8: https://www.statista.com/statistics/1104270/weekly-sandp-500-index-performance/
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
