During July and August, sometimes the stock market has a summer lull. This is a natural form of lower volatility during the summer. After all, usually everyone from larger hedge funds to retail investors like me head off on holiday at some point. Therefore, my FTSE 100 stock investments typically don’t see large moves in this period. Due to restrictions on international travel and some important events in July, I think this summer could see higher volatility.
UK inflation figures
The first event I’m looking out for is the release of June inflation numbers on 13 July. The UK has seen rising inflation so far this year, with the previous figure coming in at 2.1%. The target level of inflation is 2% from the Bank of England, so another reading above this level could see my FTSE 100 stock investments fall.
Why? Well last month when inflation fears surfaced, the FTSE 100 index took a heavy short-term tumble. So I’d expect the same to happen again this time if it’s a high number.
High inflation above target could force the Bank of England to raise interest rates to try and calm the demand. This would be damaging for companies with high debt levels. Refinancing or new debt issuances would happen at higher interest rates, costing companies more money.
Lockdown easing boost to FTSE 100 stocks
The second event has already happened in part. On Monday, the new health secretary announced that lockdown is still on track to end on 19 July. The FTSE 100 jumped 0.5% when it opened on Tuesday morning, which I think could be linked to this message.
However, I think the real boost to my FTSE 100 stock investments will come in July when we get confirmation that ‘Freedom Day’ really will happen. Until then, there’s still a lot of uncertainty — the Government has already shown that it could change policy quickly, so nothing’s guaranteed.Â
The greatest sensitivity will be seen around stocks in industries such as retail and leisure, where the removal of restrictions should enhance revenue and footfall.
Eyes on the Fed
Closer to the end of the month, I need to keep my eyes on events in the US. The Federal Reserve has its monthly meeting on 28 July.
After the June meeting, the FTSE 100 sharply fell. This was because the UK stock market is closely correlated with the US markets. In this case, the Fed expressed concern over inflation. This caused US markets to fall and dragged the FTSE 100 lower too.Â
So I need to watch here as depending on what the Fed says in July, the market ripple could cross the pond to my FTSE 100 stock investments.
Overall, July is going to be a busy month in the stock market. The lockdown easing should be a positive, but the inflation issue is more complicated. That’s why I’ve been looking at several ways to protect myself against rising inflation.