Since our last global market review at the start of this month, the MSCI World Index has begun to show signs of fatigue. Wall Street, on the other hand, has remained fairly resilient: the markets have even ticked up a little more on the back of softening inflation data. Could this mean that inflation in the US is nearing its peak? Even if that is indeed the case, it is still extremely high, and the Federal Reserve Bank is likely to maintain its hawkish stance, continuing to raise interest rates accordingly.
While global investors might feel more willing to raise their risk appetite for equities, the latest survey of professional investors put together by the Bank of America Corp’s fund managers suggests they are still somewhat bearish. That said, they are not quite so doom-laden as they were in the early part of the year.
The feeling of capitulation that permeated the markets in the first quarter of the year has abated somewhat. Evidence suggests that the US equity market rally that got underway in earnest on 16 June of this year could well signal the bottom of this current bear market.
The turnaround in US sentiment that we have seen over the past couple of months can be attributed to hopes that the current spate of surging inflation might actually have reached a peak. Meanwhile, global growth and profit expectations have slightly rebounded from those all-time lows that they hit in July.
Even Joe Biden’s “Build Back Better” plan has been reduced and comprehensively reworked from its initial proposal… and has been renamed the “Inflation Reduction Act”. Getting it through Senate just before the mid-term elections has been hailed as a much-needed victory. If the US stock market appears to be defying the gravity of the global situation, it could simply be that global investors are adopting a “TINAC” approach and taking refuge in it as a safe haven in an unsafe world, in the belief that “There Is No Alternative Country”.
When inflation is rampant, when wars are being waged, when geopolitical risks are soaring – in short when the world is in uproar – what better place than Wall Street for your money?
Over the past 12 months up until June, the US had private net capital inflows (the value of all US assets purchased by foreigners) of US$1.5 trillion, and this total has been rising at record speed since the end of last year. Global investors overweighting US securities in their portfolios goes a long way towards explaining why the US dollar index is up by nearly 15% year on year.
Furthermore, over the 12 months through to June, private net foreign purchases of US bonds stood at a near record of US$840 billion. This explains why bond yields have remained so low – despite the Federal Reserve Bank raising interest rates in a bid to tackle high inflation.
The contrarian way in which foreign investors have responded to market anguish may have contributed to the sell-off of US equities between January and June (the markets bottomed out on 16 June of this year). Since then, sentiment has become more positive, with the S&P 500 Index rallying by just over 16%.
In the UK, the consumer price index has jumped to 10.1% – the first time UK inflation has registered a double-digit annual increase in more than four decades. This increase looks set to continue for another few months, and the Bank of England expects inflation to top out at 13.3% in October.
Although the price of crude oil has actually been falling over the past month, this higher CPI figure has been driven by increases in food prices (with bread, dairy products, meat and vegetables having a particularly high impact) and landlord rents.
With inflation now standing at a 40-year high, people are looking to Conservative Party leadership candidates Liz Truss and Rishi Sunak to spell out their plans for dealing with the cost-of-living crisis as a matter of urgency. Reversing the National Insurance rise, suspending the green levy part of energy bills, cancelling planned rises in corporation tax, reducing VAT on domestic energy bills and cutting income tax are among the measures which may – or may not – be implemented, depending on the outcome of the race.
Away from politics, continuing chaos at UK airports and shipping ports over the summer has restricted supplies of essential foodstuffs and household goods, resulting in shortages. And as the Ukrainian agricultural sector remains beleaguered by war, continuing to hamper grain exports, vital crops (corn, wheat and barley) have also been hard-hit by heat waves and drought this year. Recent global data even suggests that we have just had the third warmest June on record.
As the global population increases, it is increasingly apparent that we are going to have to develop new strains of crops that will be more resilient in the face of global warming and water scarcity. Climate change is already a reality, and every other problem we are facing will be dwarfed by it unless we manage to take charge of the situation now and prevent further catastrophe.
One of the more widely accepted definitions of a recession in the UK is when gross domestic product falls in two consecutive quarters. And fears that the UK is going to do exactly that are growing: the economy shrank between April and June, and it now looks as though the downturn will last for much of 2023.
The US economy has already shrunk over the first and second quarters of this year. But Washington’s National Bureau of Economic Research defines recession differently, hence claims by the Biden administration and the Federal Reserve Bank that the US will be spared.
Slowing economic growth, surging inflation, tighter monetary conditions and heightened geopolitical risks have all taken their toll on the financial markets in recent months. However, we continue to believe that the mid-June low recorded marked the point at which this current bear market bottomed out.
Admittedly, most risky assets (such as equities) have yet to fully price in an economic hard landing… or how exactly the recession might manifest. That said, we feel that any significant stock market correction offers global investors excellent investment opportunities. And we like to think of ourselves as cautious buyers… rather than fearful sellers.