Stock market update

Markets were buoyed in July by data from the US suggesting that inflation may have peaked. All asset classes enjoyed strong returns and we saw a sharp rebound in segments of the market which were previously sold down on the back of inflation fears, such as the technology sector. During the month we observed a sharp reversal in short-term price momentum indicators which turned from red to bright green suggesting market sentiment had turned positive. So, is this the start of the next bull market or is it a false start with more pain is to come?

Despite the uptick in market performance, if we look at the data, not much has changed. Inflation still remains high, the market continues to price in interest rate rises and there is evidence that the global economy is slowing. While we are starting to see some ‘green shoots’ in terms of the external drivers that have contributed to inflation showing some signs of easing, such as the improvement in global supply chains, the jury is still out as to the effectiveness of the current rate hiking cycle on controlling inflation. Since July the US Federal Reserve has reconfirmed their commitment to rate rises until they see clear evidence of inflation abating. Furthermore, we may see more aggressive quantitative tightening (QT), which in effect seeks to reduce central bank balance sheets to fight inflation. This has resulted in a resumption of market volatility. There are also the ‘X-Factors’ such as the conflict in Ukraine and the resultant pressure on energy prices, as well as the growing tensions between China and the West in relation to Taiwan. Both ‘X-Factor’ events are unpredictable and are contributing to the inflationary pressures we are currently observing. 

The global economy is already showing signs of slowing with consumer sentiment falling, construction under increased pressure, and indicators such as PMIs (Purchasing Managers Index) showing signs of weakening. If central banks overshoot in their rate hikes, the economic slowdown will be more pronounced with a potentially deeper recession than the current expected shallow recession. 

From a portfolio perspective, we continue to keep our portfolios well diversified across key asset classes. We expect more of the same in the coming six months with markets overreacting to short-term news, be it positive or negative, as markets try to navigate where inflation will land. We are continuing to look for evidence of inflation peaking and subsequent stabilisation of bond yields. Staffing remains an issue across sectors and companies are more hesitant in providing forward guidance. We are also closely watching company earnings. To date, companies have been able to pass on rising costs to the end consumer. However, the extent to which this will continue is yet to be seen. 

(Source: https://www.lonsec.com.au/2022/08/30/false-dawn/)

More Articles

TRANSITIONING INTO RETIREMENT: WHAT YOU SHOULD KNOW

Deciding on your retirement funding options comes down to personal choice. . If you’re close to...

Read full article

The Deadliest pandemics in History

Check out the Deadliest pandemics in...

Read full article

Middle-to-higher incomes boosting SMSF growth

The SMSF sector experienced healthy growth over the March quarter, with men and women on middle-to-higher...

Read full article

The superannuation changes from 1 July

The super changes on the way from the start of the 2024-25 financial year. . A number of...

Read full article

Investment and economic outlook, May 2024

Region-by-region economic outlook and latest forecasts for investment returns. . For the last...

Read full article

Downsizer contributions can be time critical

With the expansion of the downsizer contribution, the timing of when it is used can affect how to use...

Read full article

Deeming freeze a win for Age Pensioners

Why the decision to keep deeming rates on hold may be a window for interest rates.   . In...

Read full article

Plan now to take advantage of stage 3 tax cuts

With the stage three tax cuts set to be implemented in around six weeks, opportunities for tax-saving...

Read full article

Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.

Financial Advice Sydney and the North Shore Office based in Gordon NSW

Financial Services Guide - Disclaimer & Privacy Policy

^