Market Update 23rd October 2023

Gilty feelings

This week ought to see markets calmly drifting into the autumn and the end of Summer Time. On Planet Earth, however, it is not happening and markets are undeniably feeling fragile. Last week saw bond yields rising yet again, for reasons few understand, and equities took a degree of fright. This week’s trigger points will be the quarterly earnings of the Magnificent Seven, four of which report between now and Thursday evening. It is rare that a set of quarterly earnings has such a potential impact on global markets, and we need Microsoft, Alphabet, Meta and Amazon.com to settle some of the currently jangling nerves.

At the two seminars that Hawksmoor hosted last week, I tried to argue that the weekly, monthly and indeed quarterly to-ings and fro-ings of the markets are largely irrelevant. They are distractions from the long-term, which is invariably for the better. That is undoubtedly true, but it does not change the reality that the era of information technology, and information overload, has made us increasingly obsessed with the immediate. Not just the day-to-day, but the hour-to-hour and the minute-to-minute. Nor is this going to change.

For better or for worse, this week’s earnings releases are genuinely important. In the short-term. Readers of this column will be aware of the extent to which in 2023 US equities in particular have been a tale of two stories: the Magnificent Seven, and everything else. The question has been which way this will eventually resolve itself: will the broader markets catch up with the large technology stocks, or will the latter succumb to gravity and fall back in line with everything else? The answer is no clearer now than it was six months ago.

Neither is it any clearer why bond yields keep rising.  We can all be reasonably confident that we are not to have a repeat of the last year’s inflation challenge and that bank interest rates are at, or within a bull’s roar, of their cyclical peak. There are also increasing signs that economies are starting to struggle: housing markets have cooled, as have job markets. Consumers are starting to rein back on their pre-Christmas spending. The weather is dreadful. Yet bond yields keep rising, and they shouldn’t be.

There are likely two factors at work here. First, government finances around much of the world are, broadly, in a ghastly and expensive mess. This becomes viciously more expensive with each rise in bond yields. Second, the Federal Reserve and the Bank of England are persisting with their policies of selling vast amounts of treasuries and gilts back into the open markets, in the process known as quantitative tightening. In fairness, it is probably doing its job, assuming that its job was to strangle the life out of capital markets.

All of which brings me back to the dynamic between the short and the long-term. For those not interested in the former, it is possible to argue that the gilt market, thanks to the Bank of England, is offering rather attractive value. As one vey rough example (and please treat all this as being purely illustrative, as market prices and yields will change), it is possible this morning to buy 0.25% Treasury Stock 2031 at a price of roughly 72p in the pound. That will be repaid in July 2031 (call it eight years’ time) at 100p. That is a gain of 28p on one’s original 72p, equating to (more or less) 39%. Under current tax laws, gilts are also exempt from capital gains tax, so that 39% gain is tax free. For a 40% income taxpayer, that is an equivalent return of 65%, in round numbers. Guaranteed. There is an extra little bonus of half yearly interest payments, but these are minimal and taxable.

Over the next minute, or day, or week, or quarter the price of this gilt may change for the better, or for the worse. But if you intend to buy and hold said gilt for its lifetime, then don’t worry, be happy.

Finally, some of our readers may be aware that this is my last Innovation before I head out to pasture. Before I take my first mouthful of hay, I would just like to say thank you to everyone for reading these weekly indulgences, and to Hawksmoor for allowing me to have done this for so long. I wish everyone health and happiness.

Jim Wood-Smith – Market Commentator and Head of Climate Transition

All charts and data sourced from FactSet

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