September market commentary

September 2023 Market Commentary

We hope you are keeping well and have enjoyed a rejuvenating break at some stage over the summer, or at least are about too. There was much to cheer over the summer, not least the impressive achievements of our athletes in Budapest and fearless Lionesses in Australia, however, markets couldn’t quite match these heights. Indeed, stock market momentum also enjoyed a break in August, as the weakness of the Chinese economy, and the strength of the US, proved an unsettling mix for investors.

Looking first to China, the persistent challenges in the housing market coupled with the ongoing malaise from its manufacturing (and export) sector is weighing heavy on economic performance. Hopes of an imminent turnaround also appear forlorn, as the absence of any material stimulus is keeping consumer confidence on the back foot. Yet whilst such conditions retard global growth expectations, and can deliver short-term blows to market sentiment, ironically, such weakness may prove just what the doctor ordered!?

With the globe’s major central banks articulating the peak in interest rates is nearly upon us (or perhaps even arrived), a Chinese inflationary impulse could prove destabilising to such claims, and eventually threaten further rate hikes. Given the ‘disinflationary’ impact of Chinese malaise, therefore, market anxieties more likely reside with the impressive run of US economic data.

US strength might seem at odds with weakening sentiment, particularly as resilient growth has been a source of cheer so far this year, however, markets might be starting to fear such economic resilience could reignite inflationary pressure. This narrative is supported by the relief markets enjoyed in the latter stages of the month following a round of weaker economic releases. Specific evidence of this was found in the ‘Quits’ rate and Job Openings’, which fell at an accelerating rate in August. This trend suggests ebbing confidence within the labour force and informs wage demands may follow suit. A moderation in wages, and its prospective impact on demand and inflation, would likely prove crucial in the US Federal reserve’s decision to pause on interest rate hikes.

There is, as always, a tightrope for policy makers to walk here, aiming to see off the menace of inflation, whilst also preventing a more malignant economic downturn. This is an unenviable task, however, for now, our anticipation is that ‘graduated’ weakness within the (strong) jobs market and fading inflationary pressure means US interest rate policy is at or near its peak. Indeed, it is this combination, of modest growth and less hawkish monetary policy, which remains the centrepiece of our own, marginal preference for equities.

For this to remain our core view, however, a resumption of falling inflationary prints is required. Falling inflation would support consumer spending power whilst also extending central banks the flexibility to be more accommodating with interest rate policy. Fortunately, weaker energy prices (year over year), healing supply chains, soft housing markets and growing cracks in the (still firm) labour market, suggest fading inflation can remain a core expectation and, therefore, supports a modest risk-taking investment strategy.

We must remind ourselves, however, that forecasting inflation is a notoriously tricky exercise. Should we see more persistent or reaccelerating inflation than currently anticipated, and should it lead to hawkish surprises from the major central banks, then recessionary risks would re-emerge. In such an environment one would expect equity markets to endure a more difficult period; not least given the impressive recovery in share prices this year.

Investors should brace themselves for further volatility on this basis, but we would again argue all may not be lost for equity investors in such a setting. Of most comfort would be the hope any such recession wouldn’t be as severe as more recent episodes. This more benign view hinges upon the apparent absence of major economic imbalances i.e. corporations and households don’t (in aggregate) appear to be shouldering quite so much leverage as in prior, more devastating recessions. We should also remind ourselves that having moved off the zero bound, there are now some interest rates to cut! Such policy options might prevent a more pernicious downturn and prove sufficient to reignite economic and investor enthusiasm.

Kind regards,

iPensions Wealth Team


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