Monday Espresso Podcast - 3rd July 2023

[00:00:00] Sheldon MacDonald: It's the 3rd of July today, already half the year is gone. So let's kick off with a review on what's happened so far this year. Equity market's pretty strong, the UK aside, the FTSE is probably the laggard amongst international indices up only around 3%. In Europe, though we're into mid-teens territory.

[00:00:20] Sheldon MacDonald: Japan was up over 22%. In the US a very interesting pattern. We've got the S&P, which is the bellwether S&P 500 up around 16%. But either side of that, you've got some very divergent performances. You've got the Dow Jones, which is large heavyweights up only around 4%, and you've got the NASDAQ up well over 30%.

[00:00:43] Sheldon MacDonald: Nathan, what's driving those differentials?

[00:00:45] Nathan Sweeney: Yeah, so if we take a quick look at what is driving markets. So you have to remember the market is always looking about six months out. The returns we have today is anticipating what the market will look like in six months time, and so very much the market believes that central banks will stop raising rates.

[00:01:03] Nathan Sweeney: So in six months time we'll be at peak interest rates and possibly even lower interest rates. The other thing that's really been driving markets has been the strong economy. So if we look at economic growth, it was expected to be quite bad coming into this year because of the high inflation and rising interest rates and we just haven't seen that materialise.

[00:01:24] Nathan Sweeney: So economic growth has been resilient. And lastly, there's been a lot of optimism about artificial intelligence. So is this a new paradigm shift in technology? Something which is going to drive years and years of growth to come? And the market does like that and believe in that, and that's one of the key reasons why, particularly the NASDAQ has been so strong this year.

[00:01:47] Sheldon MacDonald: Speaking of the NASDAQ being so strong, we have Apple flirting with a market cap of 3 trillion dollars, now that as you've noted in your weekly notes, that is bigger than whole sectors of the NASDAQ. So very much strength driven by that, we've all seen the hype around Nvidia in the last couple of weeks.

[00:02:08] Sheldon MacDonald: Now, just a couple of notes on historically what's happened when markets have been this strong.

[00:02:13] Sheldon MacDonald: Previously, looking back almost a hundred years worth now when markets have been up at least 10% for the first half of the year, the median return for the second half of the year is also about 10%. Now, clearly there are exceptions, the most notable amongst those being 1929 and 1987, so you never want to read too much into these things.

[00:02:35] Sheldon MacDonald: But perhaps a strong message for us there, particularly if we do think that rates are close to peak territory. Now we've had Fed speakers trying to dispel the notion that we're going to get early rate cuts. A lot of them speaking about the tight labour markets still being a threat, but we do have the minutes of the last FOMC meeting out this week.

[00:02:56] Nathan Sweeney: Yeah, so that'll be a key focus. So if you remember back to the last meeting we had from the Fed in June, they decided not to raise interest rates and what they said was, we'll wait and see what the data looks like over the next couple of weeks, and if inflation continues to come down, then that might mean we don't have to raise rates.

[00:03:14] Nathan Sweeney: But if we still think the economy's quite strong and inflation could reassert itself, we will increase interest rates. But what we're seeing is inflation data, pretty much everywhere around the globe is now starting to come down. So that's quite good news.

[00:03:28] Nathan Sweeney: But on the other side of that, we're seeing economic growth is actually quite strong. So this is providing a little bit of a headache for central banks. So we're really not sure what they're going to do at the next meeting. But the good news is inflation continues to come down.

[00:03:42] Sheldon MacDonald: The central banks might not know what to do. We also have divergences in market expectations. Are we going to get a soft landing?

[00:03:49] Sheldon MacDonald: Are we gonna get a hard landing? So our friends at Goldman Sachs still definitely calling for a soft landing. But you may have seen in the FT this morning PIMCO calling for a hard landing. The expectation is that you know the effects of hikes not yet fully felt and when those do come through, they will definitely pull up the handbrake on the economy.

[00:04:10] Sheldon MacDonald: So divergences of opinion there, that's always good for markets. It keeps things interesting. What else have we got for the rest of this week?

[00:04:18] Nathan Sweeney: Yeah, so light week in terms of data in the UK what we have is we've got the Halifax House price index, so we get some data showing us what's happening in the housing market.

[00:04:26] Nathan Sweeney: We've also got car sales data, and again, that'll give us a bit of a thermometer check on the consumer.

[00:04:33] Nathan Sweeney: Around the globe, we get this data print called PMI Purchasing Manager Index, and we also get ISM Institute of Supply Management and all those data points are, is basically surveys of purchasers, so people who buy product for the manufacturing sector and also managers within the services and manufacturing sector just to see what they're thinking.

[00:04:56] Nathan Sweeney: Are they hiring people? Are they buying new product? Are they seeing prices going up? Are they seeing prices coming down? So it just gives you a bit more clarity on what's happening in those sectors, so we get a raft of that data across the globe this week.

[00:05:09] Nathan Sweeney: And the all important thing is obviously the minutes from the central bank meeting within the US. We also get jobs numbers in the US as well this week.

[00:05:16] Sheldon MacDonald: So lots to look out for and we look forward to telling you all about it next week.