The Cambridge Weekly – 10th July 2023

The Cambridge Weekly – 10th July 2023

Markets sour on news of resilient economy

Last week we commented how the second quarter’s positive stock market returns were driven by a somewhat surprising improvement in investor sentiment. It’s surprising for several reasons. At the end of  March, fear was uppermost that the crisis facing US regional banks would lead to a serious deterioration in lending conditions and a more pronounced slowdown than previously anticipated. Surprising also because while bond yields rose, analyst forecasts of corporate profits did not change much beyond anticipating a period of stagnant growth (more on the last quarter in our June/Q2 asset returns review article in this edition).

June Review – improved market sentiment

The sunny month of June brought the feel-good factor back to capital markets. Global stocks climbed 3.1% higher over the course of the month in sterling terms, and UK investors saw most major equity indices finish the month in the black. These returns helped to round off the quarter and indeed, the first half of 2023. In the last six months, global equities have added 7.8% in sterling terms. Every major index that we track barring MSCI’s Emerging Market index – has made gains since the start of the year. As has been the theme of recent years, the US once again outperformed across each of those time periods. A resilient economy and improved monetary expectations have helped US companies, none more than BigTech. In the first half of the year, the tech-heavy Nasdaq index gained an incredible 25.2%.

Global Inflation Update

Last month’s Federal Reserve meeting was perplexing. On the one hand, the central bank did exactly what capital markets had been crying out for by keeping interest rates at their previous level. After tightening in
ten consecutive meetings, this bit of respite looked to investors to be signalling peaking interest rates with easier times ahead. On the other, Fed chair Jerome Powell used his press conference to dispel any sense of excitement. Due to persistent inflationary pressures, he intimated that the Fed will likely need to raise rates two more times over the coming months. Markets had previously hoped for just one more hike, after which financial conditions might ease – but Powell and co. have now signalled any easing in rates will not come until 2024 at the earliest.