Market Update for August:
Can Cash Really be King?

“Uncertainty is the friend of the buyer of long term values.”

Warren Buffet

Stock and currency markets performance

August has come and gone, ending in negative territory. It was certainly a “game of two halves:”

Data table is from Google Finance

The currency markets saw the USD continue to move from strength into more strength:

Data table is from Google Finance

The first half of the month was very positive, with the S&P 500 moving up 4.3% to its peak at mid-month, only to give back nearly double of all those gains in the second half.

The markets are undoubtedly in a precarious place right now. The healthy correlation between a business doing well by growing its earnings and profits and its share price increasing is non-existent. Despite companies beating forecasts, the market sentiment is dragging their value down.

I watched a documentary last night about the 1980s that featured the famous clip of the Michael Douglas “Greed is Good” speech, from the movie Wall Street. The thinking back then was that markets are driven by two emotions: greed and fear. Right now it’s fear that is causing the irrational pattern mentioned above.

Inflation versus interest rates

Inflation and interest rate increases are still the main issues. Perhaps the gains during the first half of the month were due to the silence of Fed Chairman Powell during a summer holiday. His return with the same rhetoric about the intention to raise, raise and raise again until inflation is under control was responsible for the sell-offs in the second half.

Inflation for the US in July was at 8.5%, down from its high of 9.1% in June. Granted, there’s still a long way to go, but we’re moving in the right direction. The consensus amongst Reuters economists is that the Fed’s next interest rate increase will be 0.5%, not 0.75%. If the market has factored in the latter, we may see some uplift, though I’d be looking more towards the end of October/beginning of November for the policies to have bedded in and a more rational market established.

Energy supply issues

The situation with Russia and Ukraine creating energy supply issues is not helping matters. Germany, which relied heavily on Russian gas, was given the news that Gazprom (the energy corporation owned predominantly by the Russian state) will suspend gas delivery via the Nord Stream 1 pipeline. Previously this had been put down to a “technical fault,” though this was just a guise.

The resulting shortfall in supplies will require adaptation, so Germany is building its first Liquid Natural Gas (LNG) terminals. This is the kind of thing that happens when a difficult situation triggers positive responses, which in turn create positive results.

But as we await these changes, where do we park our cash?

Interest rates remain low, with a 12-month fixed rate for USD offering between 3 and 3.5%, nowhere near inflation-matching.

Cash can of course come in many varieties: there are some 180 currencies in the world. Seven of these are considered “major,” namely the USD, EUR, GBP, CHF, AUD, CAD and JPY.

During the last 12 months, every one of these currencies has fallen against the Greenback, with the Canadian Dollar losing the least at 4% and the Japanese Yen falling a huge 22%. The view that the USD is a safe haven in uncertain times drives this demand, along with the US monetary policy of faster, more aggressive interest rate increases.

Currency trading is of course a specialist area, though currency diversification does not have to be. The GBP has fallen 16% in the last 12 months, which means any GBP investor buying a USD denominated asset 12 months ago would be 16% up, with the S&P down 13% in that same period. Those who have diversified portfolios, particularly USD, are making good returns when compared to their home currency.

Going into a market like this in a cautious way, through strategies like Dollar Cost Averaging makes sense right now. We will recover and with a longer-term view and 20/20 hindsight bargains will be realised. With that said, the importance of holding assets outside of the stock market is also important, whether alternatives, property, private business or indeed good old cash.