June – August 2023
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As has been the case throughout much of 2023, regional market dynamics and index compositions significantly impacted equity market performances over the last three months. The US market continued its strong performance this year, with the S&P 500 gaining +7.84% from 4,180 to 4,508, and the smaller-cap Russell 2000 also enjoying a strong performance, gaining +8.57% from 1,750 to 1,900. However, this only tells part of the story, with the vast majority of those gains (7.93%) coming in the first few days up to 7th June. As has been a theme through 2023, Europe again was the relative laggard, with the S&P Euro Plus gaining +1.85% from 2,217 to 2,258, and the FTSE All-Share relatively flat after a loss of -0.18% from 4,067 to 4,060. Looking beyond Developed Markets, the Asian-dominated MSCI Emerging Markets also posted a positive return, gaining +1.20% over the period.
Diving deeper into the reasons behind these moves, there is undoubtedly more optimism surrounding the economic prospects for the US after their headline inflation figure fell from a peak of 9.1% in June 2022 down to a recent low of 3% in June 2023. This did rise slightly to 3.2% for the July reading (released in August) and is expected to end the year slightly more elevated. However, headline inflation has fallen back from the heights it reached during 2022 (US CPI Peaked at 9.1% in June 2022), which may give more breathing room for the Federal Reserve to switch to a more dovish footing moving forward. This can be best seen in certain market moves, most notably that an equal-weighted basket of S&P 500 stocks rose +7.37% over the period, highlighting that returns are no longer solely driven by the ”Magnificent 7” – 7 tech-focused US companies which earlier in the year had accounted entirely for the performance of the market cap weighted S&P 500. Such an occurrence is undoubtedly a healthy sign and a signal to investors that increased exposure to the US could prove to be a prudent asset allocation decision for the medium term.
Contrasting this to the situation in the UK, it was a period of mixed fortunes for the inflation prints, with May’s figure (released in June) coming in 0.3% higher than expected at 8.7%. June, however, saw the figure release at 7.9% (against expectations of 8.2%), which promptly caused the mid-cap dominated FTSE 250 to rise +3.78% in one day. This momentum, unfortunately, was not maintained until the end of the month, with market participants no doubt wishing to see multiple lower inflation prints before meaningful share price appreciation can occur. It was again not helped by the July figure coming in as expected at 6.8% but accompanied by the revelation that core inflation (which strips out volatile energy and food) had remained at the previous month’s figure of 6.9%. On top of this, services inflation ticked back up to 7.4% from 7.2% – highlighting its continued ”stickiness”.
The annual Jackson Hole Symposium took place at the end of August which features speeches from central bankers, finance ministers, and academics from around the world. This year, the theme was ”Structural Shifts in the Global Economy,” with the main topics of discussion including the economic costs and benefits of trade and ECB President Christine Lagarde speaking about the challenges and opportunities of digital transformation. With market participants closely observing what key central banking figures both do and don’t say, much attention was given to Federal Reserve Chairman Jerome Powell’s opening statement, where he indicated that monetary policy would have to remain restrictive for some time, though also fell short of signalling any future rate hikes or cuts in the near future. Indeed, his analogy that the Fed was ”navigating by stars under cloudy skies” served as a reminder that a myriad of factors can influence the implementation of monetary policy and that there presently isn’t a clear outlook being illustrated by these forward-looking factors.
The Symposium, as well as providing insights into policymakers’ views and strategies, also fosters a spirit of dialogue and collaboration – something as essential as it has ever been as the world recovers from the historic challenges of the last few years.
With much criticism levelled at the UK economy and the government’s approach to pursuing economic growth in recent years, another large European country which has been coming in for criticism over the period has been Germany, after it was confirmed in late May that they did actually enter a recession in early 2023 after posting negative growth of -0.4% in Q4 2022, and -0.1% in Q1 2023. This was caused by a cocktail of factors, including restrictions in household spending, knock-on effects from the US economy slowing down, lower industrial order books, and the aggressive tightening of monetary policy. This was further compounded by the revelation in August that the economy had stagnated in Q2 with zero growth, with forecasts being that this will remain largely unchanged for Q3. Owing to Germany’s status as the largest economy in the eurozone, market participants across the globe will be hoping that fiscal and monetary policymakers can arrest the slide and stoke the flames of growth once more.
