Wealth Watch - 29 July

Stock Take

So much for a quiet summer. Global markets took Joe Biden’s decision to drop out of the US presidential election race in their stride, beginning the week in more positive mood. While contemplating the prospect of a closer contest against Trump, investors’ focus was on a packed week of corporate earnings, together with key inflation and preliminary growth data from the US.

Despite a recent sell-off, the behemoth technology names have continued to drive market gains this year, sparking growing concerns about the sustainability of their lofty valuations. Tesla and Alphabet were the first of the so-called Magnificent Seven to report quarterly earnings. Google-parent Alphabet beat revenue and profit estimates, driven by digital advertising sales for events like the Paris Olympics and elections in several countries. However, investors were unnerved over whether the vast amounts being spent on Google’s AI capability was actually earning a return. Tesla reported its worst profit margin for five years and missed analysts’ earnings forecasts as EV price cuts to revive demand and increased AI spending took their toll.

Disappointment with the early earnings reports saw stocks worldwide fall sharply. On Wednesday, the US S&P 500 and Nasdaq indices suffered their biggest one-day falls since 2022. Japan’s Nikkei index fell by more than 3% the next day. When added to the tech wobble at the end of the previous week, more than $3 trillion was wiped off global stocks in just six trading sessions.

The Federal Reserve’s rate-setting committee meets this week. Expectations of a September interest rate cut remained intact after preliminary figures showed the US economy grew faster than expected in the second quarter, expanding at an annualised rate of 2.8%. This compared to 1.4% in the first three months of the year.

“US GDP surprised positively thanks to better-than-expected consumer spending,” commented Hetal Mehta, Head of Economic Research at St. James's Place. “Despite signs of a cooling labour market, the economy is holding up well as fiscal support remains sizeable. A strong economy is usually helpful for the incumbent going into an election, although current betting odds and favourability data give the Republicans the lead.”

With the rate-setting decision due soon, central bank officials would also have been heartened by news that the personal consumption expenditures index (PCE) – one of the Fed’s key inflation measures - increased at a rate of 2.5% after surging to 3.7% in the first quarter.

Turning to Asia, the start of the week saw a surprise interest rate cut by the People’s Bank of China. This came after data showed weaker-than-expected growth in the second quarter. Investors were underwhelmed by the move, in part as it emphasised the weakness of the economy, which is beset by a prolonged property crisis, surging debt, weak business and consumer sentiment, and the threat of deflation.

Further evidence that Chinese consumers are cutting back came with news that LVMH, the world’s largest luxury group, saw its sales in Asia fall 14% in the second quarter. This came after a 6% drop in the first three months of the year. The company, home to brands including Tiffany & Co., Luis Vuitton, and Dior, is not the only big name feeling the pinch from a slowdown in Chinese demand for luxury goods. Burberry and Swatch Group were among others reporting falling sales in mainland China.

Meanwhile in Europe, after a lull in the run-up to the general election, UK business activity has picked up this month, as manufacturing growth hit its fastest pace in two years. There was also better news for the Bank of England in its inflation fight, as businesses raised prices at their lowest rate since February 2021.

However, a downturn among manufacturers in the eurozone meant that business growth stalled in July, adding to other indicators that the region’s recovery is faltering. “Economic sentiment has deteriorated markedly, driven largely by a slump in Germany, which is being hampered by a lack of digitalisation and China’s transition from being customer to competitor in car manufacturing,” added Mehta. “However, credit conditions continue to improve modestly so should provide some economic support.”

Europe’s biggest banks were among the whirlwind of mixed earnings announcements. Deutsche Bank posted its first quarterly loss in four years after making provision for an investor lawsuit, but others largely beat earnings expectations. Santander, the eurozone’s second-largest bank, gained 3% following strong growth in its main retail business.

Global stocks steadied at the end of the week, boosted by the improving US inflation outlook. But with Meta, Apple and Microsoft publishing their results this week, volatility in markets may well continue over the coming days.

Wealth Check

Whether you’ve got 20 years before you retire or just a few, it’s important to have an idea of just how much money you’ll need for a comfortable lifestyle once you stop earning a regular salary.

Helpfully, the Pension and Lifetime Savings Association predicts approximately how much individuals and couples will need in their pension pot, to have a comfortable, moderate or minimum standard of living in retirement.

The important thing to be aware of is, these figures have increased in the past 12 months. The PLSA’s latest figures, released in February 2024, show that a single person will now need ￡14,400 a year to achieve the minimum living standard, a rise of ￡1,600. They would need ￡31,300 a year for moderate, and ￡43,100 a year for a comfortable lifestyle, which includes a two-week holiday in Europe and several UK mini breaks. For couples, the price tag of these three lifestyles is ￡22,400, ￡43,100 and ￡59,000 per annum.1

The minimum living standard covers most people’s basic needs. For example, you could holiday in the UK, eat out about once a month and spend around ￡600 on clothes and footwear a year. But don’t expect to run a car.

The moderate lifestyle provides, in addition to the minimum lifestyle, more financial security and increased flexibility. For example, you could take a two-week holiday in Europe and eat out a few times a month. And you could afford to run a small car.

At the comfortable level, you could enjoy some luxuries like regular beauty treatments, theatre trips and at least two weeks in Europe a year.

By putting a ballpark figure on actual lifestyle choices, the PLSA aims to help people develop their own personal savings goals based on their individual circumstances and expectations. Having a concrete goal based on things you enjoy doing, such as holidaying, or eating out with friends, is a powerful psychological motivator to keep saving.

Whatever stage you’re at on your saving journey, having a specific income in mind can help you focus on the end goal – and look forward to it!

Source

1Retirement Living Standards, Pensions and Lifetime Savings Association, 2024. All figures quoted were developed by the Centre for Research in Social Policy at Loughborough University on behalf of the PLSA.