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Market Update for July:
The Tortoise and the Hare?
“Patience is a key element of success.”
Stock and currency markets performance
July has come and gone and and the start of the second half is a positive one for those invested in the international markets:
Data table is from Google Finance
For just the second month this year, the last time being March, we saw a positive month across developed markets. The S&P saw its biggest monthly gain this year; in fact, bigger than any last year. November 2020 was the last time we saw returns to match those we have just had.
The currencies markets saw something of a mixed month, although the USD remains the go-to in these difficult times.
Data table is from Google Finance
Concerns over inflation and its fixes
As the markets expected, we saw interest rates increases of 0.75% at the most recent US Federal Reserve meeting. You will have read in previous blogs about my concerns over some of the statements coming from the Fed. A raise, raise, raise “at all costs” policy is worrisome.
What is comforting is some of the language being used by Fed chief Jerome Powell, noting that some time now needs to be taken to see the deflationary impact of the recent aggressive interest rate increases. Recognizing the need to slow things down for a while is something the market should have liked and this is illustrated in the results.
US interest rates being offered on 30 year mortgages fell, despite a range of potential problems, not least in the housing markets due to over borrowing at low rates and no wage increases. I think there is a misconception that we have entered territory not seen for many years, but at the end of 2019 this interest rate was the same as it was today.
With the summer holidays now upon us and no more Federal Reserve meetings until the end of September, I expect the next couple of months to be relatively benign, especially compared to the volatility we’ve seen so far this year.
Nowhere has this volatility been more apparent than in the technology sector. The month of July saw the value of Amazon and Tesla shares rise a whopping 31% and 32% respectively, with Apple close behind at 19%. While these businesses and their share prices will continue to experience larger swings than most in both directions, I do feel they have bottomed out as investors recognize their long term value.
Consumer spending rebounding after COVID
I have written often in the past about the consumer and how on a global scale it’s their spending which drives growth. However, when supply wanes and this consumer demand continues to grow, one of the negative results can be inflation, which is an important aspect of what we are experiencing now.
The current high rate of inflation can be attributed to the consumer remaining strong and continuing to spend. The COVID pandemic has meant people are playing catch up, especially in travel and leisure. This leads to growth in other discretionary spending such as luxury goods and technology, two of my favorite sectors.
Supply chain problems are another fallout from the last two and a half years of pandemic, but just as we are returning to normal on the demand side, so will we on the supply side too.
Cynical views on current interest rate policy may point to the Fed’s desire to crush the spender, though another solution is in increasing supply. History will judge decisions made when COVID hit, the lockdowns and the economic fall out from that which we are trying to cope with right now.
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The new normal?
The so-called new normal seems very close to the old normal to me. I am currently on a summer holiday in Europe, where only the occasional mask can be seen, you have to actively search for a hand sanitizer and the handful of countries that even have COVID related entry requirements don’t seem to be checking. Tourist attractions seem as busy as they were in the summer of 2019 and despite the odd tired-looking signs requesting social distancing, none are being followed.
Asia will soon catch up on this. Things will get back to how things were before March 2020 (what can be called normal?), and this includes normal levels of inflation.
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