The large falls in markets around the world over the past few days have been concerning. Throughout June and July, it seemed as if the Global ‘tech’ market could only ever keep rising. Indexes such as the US Nasdaq which contains large tech names like Apple, Microsoft, Nvidia and Amazon – just kept on rising. This obviously assisted our client portfolios.
This euphoria abruptly came to an end last week when US new jobs data came out – showing the US employer is hiring less. When adding this to other data, markets started to sell off as they anticipated recession in the US.
I have repeatedly said this for two years – ‘the only game in town is central bank interest rates’.
This is why.
After the credit crunch in 2008 which ravaged the Global Economy leading to considerable losses – the central bankers became famous ‘rock stars’. Suddenly, these traditionally boring number crunchers were the lifeline to the markets and so the markets dependency on cheap money begun.
Low interest rates and Quantitative Easing pushed massive amounts of money into the system – allowing businesses, home owners and investors alike to borrow cheaply and then speculate. This idea was great. The problem was that nobody wanted to it to stop.
As inflation took hold in 2022, central bankers turned from rock stars to pantomime villains. The markets booed and moaned as the money supply was squeezed with rising interest rates.
In the past year, we have seen markets get excited about ‘impending’ rate cuts that have failed to materialise. The Federal Reserve in America is crucial to the Global Money supply. Their reticence to cut rates is now starting to weigh on sentiment. Hence the huge drops yesterday.
However, let’s just consider some key facts that the FED will be watching. Yesterday the monthly PMI (Purchasing Managers Index) report came out for July. This is a Global report that takes into account some 40 economies around the world. It consider the growth or shrinkage of aspects such as the services and manufacturing sectors. The PMI reading is a very important indicator of Global economic strength. Generally, a reading over 50 suggests a stronger outlook.
The Global PMI reading came in yesterday for July at 52.5 – this was down by half a point from 52.9 in June but still way above the ‘danger level’ that predicts recession.
In addition, the fastest growing economy in the developed world was….you guessed it…..the US. Interestingly followed by the UK with faster growth than the Global average and much better manufacturing growth than Germany, Russia and Japan. I’m going to talk up the UK here – we are currently in a much better position than the media (and new government) would have us believe. If the US goes a bit whacky in November’s Presidential elections – we could end up being the best bet for international investment.
To get back on track! The Federal Reserve are very unlikely to therefore suddenly cut interest rates at an emergency meeting. There is a strong probability that they will cut by 0.5% in September – but it will continue to be slow and boring. No 2008 rate chops yet.
Of course this could change if we suddenly see market contagion – in other words really good companies being sold to fund cash shortfalls. However, as I write this article, there is no sign of this.
So, in summary. We believe the markets got overexcited yesterday. Yes, some froth needed to come off the top of those magnificent seven stocks like Apple and Nvidia. However, the narrative of the US plunging into a recession is not currently being backed up by the factual data.
There are some silver linings to these clouds as well. Firstly, we noticed Bond funds lifting nicely yesterday as a ‘flight to safety’ started. This will have really helped to counter falls in our Level 1-3 portfolios. Secondly, the US markets have been far too heavily skewed towards seven stocks for far too long. Maybe yesterday’s rout will change perceptions and show traders that they need to get back to proper diversification.
Tracker funds will have been really punished in the past week – because those seven mega stocks represent such a huge proportion of the index being tracked. Active funds, such as the ones we seek to include in our client’s portfolios, will have sought to better diversify – thus reducing the impact of losses on portfolios.
I hope that this helps. As ever, we are here if you need anything at all. Nothing is too much trouble. My very best wishes.
Darren
