Perspective is terribly important. Having spent much of the past week on golf courses looking like the surface of Mars, in temperatures that might not have been out of place on Venus, it might be tempting to muse over the oddities of the weather. For readers further north, with allegedly more typical summer weather, this might appear to a parochial perspective on climate change.
My introduction this week is not entirely random. Bull market? Bear market? It all depends on where you started from. The MSCI US Index bottomed on 16th June, almost exactly 25% below its peak on December 27th last year. It has since risen 17%, to leave it a less unsettling minus 12% for the year to date. So is this a market that is plummeting, or one rising like a rocket? If I may continue with the astronomical analogies: the market is undoubtedly moving at meteoric speed, but is it upwards or downwards?
You will have different answers to the question dependent upon whether you invested on 26th December or 15th June. Both are equally valid. The rises of the past two months have been stronger and longer lasting than had been thought possible. It is, one might argue, an astonishing display of confidence in the Central Banks to navigate their way out of the creek that they deny steering into in the first place. Nonetheless, the markets’ narrative is one of ‘peak inflation’. This in turn means less aggressive increases in interest rates and a smaller chance of recession. It is certainly feasible.
There is a predictably perverse relationship between the apparent popularity, or otherwise, of stocks and their prices. Earlier this summer, it was nigh on impossible to find a solitary sole with a good word to say about Amazon.com. It felt as if there was a queue of clever people waiting to be the next to say how they had finally run out of patience with the western world’s favourite internet shop and provider of cloud solutions. Since then, the stock price has risen an immodest 40%. Microsoft has notched a not-to-be-sniffed-at 19% rise from trough to last Friday, and is now 15% below its high point last November.
The cause of the ongoing optimism was last week’s news that American inflation in July was a mere 8.5%, which was encouragingly lower than June’s 9.1%. This tells us a number of things, none of which is necessarily helpful. First, the inflation numbers are very erratic on a month by month basis. And here we come back to perspective. A year or so ago, an inflation rate of 8.5% would have seemed alarming in the extreme. Now, however, it is a case of ‘phew’. Our second reflection is that markets are looking for good news. They want to believe in peak inflation, an easing of the pace of rate increases, a soft economic landing, unicorns and a city of gold that lies in the deep distance. That makes them quite susceptible to bad news.
But let me not be overly grumpy today. Markets have developed a habit of performing better in the second half of the year. 2020 was the proof of the pudding, when a near catastrophic first half and lockdown-inspired economic collapse morphed into a quite remarkable turnaround, funded by the magic fairies of quantitative easing. Could 2022 turn into the year when markets eventually ignored double digit inflation and aggressive interest rate rises? Yes, it could do.
The markets face two important tests this week. First, technically the indices in the United States are bumping into their falling 200 day moving averages. This is an important test of the strength of the downtrends. Second, on Wednesday we see the release of the minutes from the last meeting of the Federal Open Markets Committee. This should put some flesh on the bones of the last rise in rates and the Fed’s intentions for the next meeting in September. These minutes are always something of a game between the Fed and the markets. The words are always over-analysed for hidden meaning, which the Fed knows all too well. The reality is that the world may look very different by the time the Committee reconvenes on September 20th and 21st.
On Wednesday, we also have an update to the UK’s inflation rate. Since we last wrote, the Bank of England has raised its prediction of the peak to something in excess of 13%. And so whether this update is 9.8%, as predicted, or 10 point something matters precious little. How, one might question, can we possibly have an inflation rate of 13%? I could use bold text here, and use multiple questions marks to emphasise 13%. But I resist. I muse instead, that it is a pretty good effort from all concerned, especially from the multifarious parties that deny that it is anything to do with them.
Finally, the usual well done to all those who knew Sid Waddell’s immortal ‘Magic darts”. Today, something more meteorological: “It doesn’t matter whether skies are grey or blue. It’s raining in my heart ‘cause I can’t be with you. I’m only living for the day you’re home to stay. So…” So what?
Jim Wood-Smith – CIO Private Clients & Head of Research
All charts and data sourced from FactSet
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