Investment Comment
30th June 2023
Dr Pangloss
Last week’s note struck a gloomy tone (at least for the UK) and yet markets seem more optimistic. So we ask ourselves, can things really be this good?
With just one more trading day until the end of June, the first half of the year has been a story of a resurgence in stocks after the challenges of 2022 and bonds have stabilised after the unprecedented beating they took last year. Confidence in the US economy is strong, and this is supporting markets even though the fabled “Fed-pivot”, the move to lower interest rates, has been long delayed and indeed rates seem set to rise higher before they peak. Whereas last year, rising interest rates were negative for equities and bonds, this year they have decoupled in their responses.
There was a raft of positive economic news out of the US this week and the economy remains robust despite the fastest tightening cycle in decades. While it remains unclear whether this is recession avoided or simply delayed (and the lagged impact from monetary policy tightening leads us to this view), in the short term the strength is clear and does not suggest that the economy will drop into recession any time soon.
Reflecting this strength, first-quarter US GDP was revised upward to 2% from an earlier estimate of 1.3%. Growth in personal consumption expenditures was as high in the first quarter as at any time in the last 20 years (excluding volatility around Covid). While this data looks back, more timely data tells a similarly positive story. The US labour market also continues to show strength, with initial jobless claims declining by 26,000 to 239,000 in the week ending 24 June. Consumer confidence is improving; the latest indicator from the US based conference board was much stronger than expected and hit a 17-month high. This is not exclusively a US phenomenon with Europe’s consumer confidence hitting a 16-month high and the UK’s version hitting a 17-month high. With expectations that inflation will ease further in the US and Europe, sentiment appears to be improving. US new home sales also rebounded more than the market expected and durable goods orders, which were expected to have shrunk in May, expanded.
With all this positive economic data and sticky core inflation, central banks are going to have to hike interest rates further. However, it appears that investors don’t think that these higher rates will inflict an economic downturn. Historic precedents suggest that this is unlikely, but the Covid pandemic has played havoc with the economic cycle and the ongoing shockwaves are creating unusual patterns. Also, following the mini-banking crisis in March 2023, the Federal Reserve has pumped significant liquidity into the banking sector, mitigating the economic impact and indeed the US banking sector received a clean bill of health in the latest stress tests released this week. Add in supportive fiscal policy and consumers still flush with savings accumulated during the pandemic and one can paint a rose-tinted picture.
Russia and what we don’t know
The events of last weekend were extraordinary. The uprising of Yevgeny Prigozhin’s Wagner militia against the Russian government was a major geopolitical event. The uprising got to within hours of Moscow without facing resistance, and its leader called out the incompetence of the Russian military leadership, albeit not Vladimir Putin directly. And then it fizzled out with Prigozhin heading to Belarus following talks with President Lukashenko with seemingly no repercussions. While the implications for the Ukraine war are unknown, this demonstrates that Putin’s regime is more vulnerable than previously believed and the odds of regime change in Russia have risen.
It is notable that markets have been more or less unmoved by what happened. Is this because the events, while geopolitically momentous, are financially irrelevant, or because the market implications of the events are simply impossible to estimate? In the short-term, the implications are too complex for there to be trades to make but in the longer term a more unstable Russia could have significant market implications.
All expressions of opinion reflect the judgment of Artorius at 30th June 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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