Markets pause for breath in June

Monday 3 July, 2023

Headlines in June centred around decisions made by central banks in response to a puzzling macroeconomic backdrop. Despite efforts by central banks, inflation remains elevated, but markets continue to climb the ‘wall of worry’. 

That being said, in the penultimate week of the month, stock markets paused for breath. This could have been the result of profit-taking around a key rebalancing time for investors, or in reaction to more hawkish central bank response function.

Stock markets

The tech-orientated Nasdaq index has steamed ahead this year, fuelled by Artificial Intelligence (AI)-mania. It has now suffered its first weekly decline in two months. Likewise, the broader S&P 500 index recorded its first drop in six weeks. The Japanese Nikkei 225 index, which has gone toe to toe with the Nasdaq this year, also retraced some its gains in the penultimate week of the month. Despite the rally fading, the Nasdaq and S&P 500 are still up nearly 5% for the month, and the Nikkei 225 over +5%[1] in local currency as illustrated in the graph below.

Markets in June  

Nikkei vs S&P 500 vs Nasdaq

Source: Morningstar

Broadening participation after a narrow rally

In June, we started to see some broadening of the participation in the US stock market, with small-cap stocks and some cyclical sectors like industrials and materials rebounding. However, the S&P 500 has still largely been driven by the ‘Magnificent Seven’ – Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia. This ‘narrow rally’ has been driven by tech / AI companies, but widening to other sectors is a healthy sign for the stock market rally. 

Interest rates

As had been widely expected, the Federal Reserve (the Fed) refrained from hiking rates for the first time since the beginning of the current tightening cycle, which began in March 2022. Nevertheless, the market expects further rate hikes given a resilient labour market and a rebound in housing. On the other hand, headline inflation is falling and the economy is slowing. 

Importantly, monetary policy acts with a lag when it comes to the broad economy. Thus, the full effects of the aggressive rate hikes of the last year have yet to fully work their way through the system. While the large fiscal handouts during the pandemic did contribute to inflation earlier on, both consumers and corporates appear more resilient in the face of higher interest rates.

In the UK, the Bank of England (BoE) hiked interest rates to 5%, the highest since 2008. Core inflation, which excludes food and energy, has accelerated to its highest level in 31 years, indicating that the BoE cannot afford for the lags of monetary policy to kick in and risk inflation becoming more entrenched. 

Interest rates over the last decade in the UK  

Source: UK office for National Statistics, Bloomberg

As we close the chapter on the first half of 2023, the macroeconomic picture remains ambiguous. Whilst we have seen a strong rally for global markets in the first six months of the year, cracks are building up, emphasising the importance of owning a balanced basket of assets. We continue to advocate for a selective approach of quality companies that have pricing power and can compound earnings over the longer-term.

Risk warning

This communication is issued and approved by Lonsdale Services Ltd. It is based on its understanding of events at the time of the relevant preparation and analysis. The information and opinions contained in this document are provided by Lonsdale and are subject to change without notice and should not be relied upon when making investment decisions. The value of your investments and the income from them may go down as well as up and neither is guaranteed. Investors could get back less than they invested. Past performance is not a reliable indicatorof future results. 

Changes in exchange rates may have an adverse effect on the value of an investment. Changes in interest rates may also impact the value of fixed income investments. 

The value of your investment may beimpacted if the issuers of underlying fixed income holdings default,
or market perceptions of their credit risk change.There are additional risks associated with investments in emerging or developing markets. The information in this document does not constitute advice, nor a recommendation, and investment decisions should not be made on the basis of it. The material provided should not be released or otherwise disclosed to any third party without prior consent from Lonsdale.

 

Latest News Next Article Previous Article