Late cycle volatility - the week ahead

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

After six months of rising share prices, the volatility of the past couple of weeks has been a reminder of how markets work. The ups and downs that are typical of the later stages of a bull market are the price investors pay for the long-run outperformance of shares over smoother assets like bonds and cash.

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Here we go again

The 5% fall in the S&P 500 in the first three weeks of November is no big deal. Markets correct like that all the time. But after a summer of steadily rising share prices, it has been a reminder that bull markets are never a straight-line affair.

The two main triggers for recent market volatility have been anxiety about interest rates and tech stock valuations. Both took a more favourable turn towards the end of last week.

After two rate cuts from the Fed since the summer, doubts had started to emerge about the likelihood of a third in December in the face of sticky inflation. So, comments from New York Fed President John Williams, suggesting a near-term cut remains on the table, were taken well by the market and the US benchmark swung back from early losses to add 1% on Friday.

That built on strong revenue growth from Nvidia mid-week and hopes for a government green light on chip sales to China to ease concerns about the important AI narrative. The mood going into the weekend was better than it had been all week, and this week has also started on the front foot with gains in Asia and Europe.

• Read: 10 scenarios for surviving a stock market bubble
• Read: Fund ideas for readers worried about a stock market fall

Retail focus

Thursday’s Thanksgiving holiday, and the Black Friday sales it ushers in, mean the spotlight will be firmly on the US consumer economy this week. Tomorrow brings retail sales data for September, with an expected cooling of demand as consumers battle with higher prices and growing job worries.

Fears about the strength of the US economy are starting to impact markets. Less so the headline S&P 500 benchmark, which is largely driven by the big tech stocks, and more the equal-weighted index which is more cyclical and attuned to the ebb and flow of consumer confidence.

The equal-weighted S&P 500 has now fallen back below its peak level in February, suggesting a broader-based correction may now be getting underway. If so, that would chime with the latter stages of the dot.com bubble, when the Nasdaq index soared in 1999 even as the broader market rose more modestly. Another feature of the last year of the tech stock boom in the 1990s was increased volatility, so the past couple of weeks may be a taste of choppier markets in the months ahead.

Big Bad Budget

Over here in the UK, there will be less of a focus on the stock market and more concern about how bond investors respond to what is expected to be a highly consequential Budget statement by the Chancellor, Rachel Reeves, on Wednesday.

After months of speculation, the brutal logic of the political economy will come home to roost this week. A government that has failed to find the economic growth it promised at last year’s election, which can’t get the spending cuts it wants past restive backbenchers, and which has no headroom for more borrowing, has only one option left - higher taxes.

Having ruled out increases in the big revenue earners - income tax, VAT and national insurance - it is expected to resort to a smorgasbord of smaller tax hikes to fill an estimated £30bn shortfall in the public finances.

That’s risky for two reasons. First, it is hard to find a significant sum without engaging a broad-based tax like income tax. Second, trying to do so with a plethora of more narrowly focused measures opens up the likelihood of unintended consequences. The shadow of George Osborne’s ‘omnishambles’ Budget of 2012 hangs over the Treasury. Ill-thought through taxes, potentially leading to rapid policy U-turns, can erode the trust of both markets and the public.

The support of the bond market matters because the government spends more than £100bn a year on debt interest. A one percentage point movement either way in the cost of borrowing is worth £17bn to the government. Keeping the bond vigilantes onside has a real-world impact.

The main areas to focus on this week are: income tax - including an extended freeze of the thresholds at which people are dragged into higher tax bands; pensions - including a potential curb of salary sacrifice, a mechanism that helps retirement savers pay lower taxes on their pension contributions; ISAs - including a rumoured reduction in the cash ISA allowance; property - including potentially higher bills for owners of more expensive houses; and inheritance tax - including measures to make it harder to avoid death taxes by giving money away towards the end of your life.

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• Read: What can we expect in the Autumn Budget?
• Read: Why are people talking about salary sacrifice? The basics
• Read: How much cash to hold in retirement