Investment Update — June 2022
After falling for 7 consecutive weeks, the S&P 500 finished the month with its best weekly gain since November 2020, climbing 6.6%. The index briefly dipped into bear market territory on Friday 20th May (a bear market is defined as a decline of 20% from its high), the longest losing streak since the dot-com bust of 2000.
Inflation fears have recently given way to growth fears amid weaker than expected economic data, and warnings from US companies including Target and Walmart that inflationary pressures are eating into profit margins. Sales of new US homes fell to their lowest level since April 2020 as record prices and higher mortgage rates squeezed first-time buyers, and disappointing manufacturing and services data provided further evidence of a slowing economy.
However, we had further evidence that US inflation has peaked with the Federal Reserve’s favoured gauge rising just 0.2% month-on-month in April, the smallest gain since November 2020. This prompted the market to scale back expectations for the pace of the Fed tightening. Strong corporate earnings from a number of US retailers also calmed fears that consumer spending would collapse in the face of rising rates and high inflation, corroborated by the release of strong US consumer spending data for April.
We believe US recession fears are overdone. Whilst recent economic data has been poor, it has contained few surprises. The US housing market is cooling off in the face of rising rates and higher prices, and weaker manufacturing and services data is largely due to supply chain issues. However, supply chain disruptions continue to ease and there are tentative signs that the US labour market is starting to soften. Ordinarily, this would be bad news, but higher unemployment and easing wage pressures will allow the Fed to sound a little less hawkish in the coming months.
In the UK, the Chancellor’s announcement of a £15bn injection into UK households to help alleviate the pressure of rising energy bills comfortably exceeded forecasts, and consumers can also call upon excess savings accumulated during the pandemic. The UK economy is also enjoying a buoyant labour market with strong wage growth and more job vacancies than people seeking work. The Bank of England will probably hike rates twice more over the summer, but the government’s generous intervention means the probability of a third hike in September has now risen.
Inflation is becoming increasingly problematic in Europe, but interest rates remain at -0.50% and they’ve just announced sanctions on Russian oil imports. Inflation came in at 8.1% 31st of May and it will be late summer before this number peaks. Markets now expect the ECB to hike in July and September to bring rates to zero, despite consumer spending yet to return to pre-pandemic levels. Negative interest rates are an experiment unlikely to be repeated by central banks again.
China has started easing Covid restrictions in Beijing and Shanghai and the authorities have rolled out new stimulus measures to support the economy. With the developed world raising interest rates China is going against the grain by easing policy, but it has little choice. The domestic economy has been battered by Covid restrictions and a slump in the residential property market. Cheap valuations and easier policies are setting the scene for a period of strong Chinese equity market performance later in the year.
There has been no ‘new’ bad news in recent weeks, we’ve had further evidence that US inflation has peaked and US consumer spending remains robust. We expect this resilience to continue given labour market strength, rising wages and government support. Corporate earnings continue to grow and as US recession fears recede, we expect stock markets to recover in the second half of the year.
If you have any qustions, please don’t hesitate to contact us.
Head of Investment, Skerritts
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