With central bank policymakers unable to soothe concerns about inflation and a possible recession, our head of markets shares his thoughts as we start the second half of the year.
With central bank comments still ringing in investors’ ears, markets ended a dismal first half of the year on a despondent note.
The increasing consensus is that central banks, quite simply, misjudged inflation. As such, they find themselves in catch-up mode and, as reiterated in the forum earlier this week, they are committed to control inflation even if the impacts become recessionary.
The flagship S&P500 index ended the half-year down by 20.6%, representing its worst performance since 1970. The Dow Jones, meanwhile, has fallen by 15.3%, while the Nasdaq index – representative of high growth and big technology companies – has lost 29.5%.
At the same time, the consumer is inevitably feeling the pressure, which has particular relevance to the US economy. The increase in prices, especially food and energy, has left consumer confidence shaken and under the impression that inflation has yet to peak.
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The Federal Reserve maintains that the economy can withstand the current attack on interest rates, and the imminent quarterly reporting season will heap pressure on companies to reverse the trend of declining sentiment. This will be no mean feat, given the pressure on margins and an uncertain outlook, and as seen in the previous quarter, earnings misses will be severely punished.
Some market historians are pointing to the fact that such steep declines are often followed by sharp rebounds, but at the present time there is little to suggest any turnaround. Until such time as the triumvirate of concerns – persistent inflation, the recession threat and aggressive rate hikes – show some signs of moderation, markets will continue to be volatile and investors skittish.
Asian markets were understandably nervous overnight, despite data suggesting that Chinese factory activity rebounded sharply from the restrictions which various lockdowns had caused. Sentiment among Japanese manufacturers deteriorated in the last quarter, while growth stocks in general have been at the centre of selling waves as has been seen elsewhere.
For the UK, there has been a tale of two markets for the half-year. The FTSE250 index, seen as more domestically focused and therefore a more accurate barometer for the economy, has seen a similar decline to US markets and has dropped by 21% in the year to date.
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On a relative basis, the FTSE100 has been a rare beacon of light, having lost 3.5% so far this year, most of which can be offset by an annual dividend yield of 3.6% for the index, on a total return basis.
The large exposure of the index to oil and mining stocks has been supportive given general commodity prices, while sterling weakness has also enriched the overseas earnings on which the constituents largely rely. However, as evidenced by another weak opening, volatility and uncertainty unfortunately remain key watchwords.
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