Monday Espresso Podcast 4th July 2022

[00:00:00] Sheldon MacDonald: It is the 4th of July today, halfway through the year already and obviously a difficult first half of the year. We've got many indicators, many markets, still in bear market territory. Nathan.

[00:00:11] Nathan Sweeney: Yeah. So some big moves over the first half of the year was obviously a particularly difficult period for equity markets.

[00:00:17] Nathan Sweeney: So if we take the S&P as an example, the S&P, down 20% year to date, and if we put that into context, it's actually the worst, first six months of the year that we've had in markets since 1970.

[00:00:30] Nathan Sweeney: So it kind of really gives you an idea of the extent of the pullback in markets that we've had this year really is unprecedented, even in a historical context.

[00:00:40] Sheldon MacDonald: So a difficult period, but UK investors, perhaps haven't felt the brunt of it as much as perhaps international investors have and that's because we've had a weaker Sterling. Sterling having dropped around about 10% versus the dollar, also having lost against the Euro, means that UK investors actually didn't feel as bad.

[00:00:59] Sheldon MacDonald: The losses for US equities around about 10% in Sterling terms. So UK investors perhaps insulated slightly from those moves, but still a difficult period, nevertheless. And also we had last week, another negative week for equities as recession concerns come to the fore.

[00:01:17] Nathan Sweeney: Yeah but I suppose some of the positives from last week, we did have bonds performing last week. And so that's just showing you that fixed income, actually, beginning to work again, because bond yields are at a higher level, but it also shows you that a number of markets are indicating that we are potentially moving towards a recession. So, you know, we mentioned equities and equities in a bear market, defensive sectors outperforming, and that would indicate that, you know, we're moving towards a recession.

[00:01:44] Nathan Sweeney: We've got commodities which have been weaker and particularly the copper price has been falling. And again, so Dr. Copper would be used as a metric to give you a sense of what's happening in the global economy and generally when it's falling, that means that we're moving into a contractionary phase.

[00:02:00] Nathan Sweeney: So there's a number of indicators there suggesting that a recession is looking likely.

[00:02:05] Nathan Sweeney: And last week we did have some data from the US, so we had the ISM manufacturing data and that data has moved into contraction. So a level under 50 means contraction and then anecdotally, if you want some high frequency indicators or indicators which tend to come out before the official figures, you'll see that furniture, which is in transit from China and Vietnam to the US, those figures are way down. Which is showing you that, you know, housing is weaker and demand for goods within housing is weaker, so lots of signs there that recession is the likely outcome.

[00:02:43] Sheldon MacDonald: Yeah, the market definitely starting to move away from inflationary concerns to recessionary concerns and those ISM figures, some of the earliest numbers that we get, the services still above 50, so that's still positive.

[00:02:56] Sheldon MacDonald: Whereas though, the manufacturing level dipping below that 50 level that indicates or separates expansion from contraction. Now, inflation concerns though, still with us in Europe. Europe inflation, very much influenced by energy costs and the ECB signaled again last week that in their next meeting, they will be raising rates by about 25 basis points.

[00:03:19] Sheldon MacDonald: In the week ahead, we will hear more from Christine Lagarde and other ECB governors, and we expect to hear that message reiterated. Nathan mentioned bond yields a minute ago.

[00:03:29] Sheldon MacDonald: Bonds performing relatively well, that's as you'd expect you know as the market begins to expect recession.

[00:03:35] Sheldon MacDonald: In a recessionary environment, you get lower inflation.

[00:03:38] Sheldon MacDonald: So bonds started to look ahead beyond the current inflation peak towards lower inflation in the months ahead.

[00:03:45] Nathan Sweeney: All of this talk about recession could be perceived as being quite negative, but I think it's important to give you guys a statistic.

[00:03:52] Nathan Sweeney: So if we do remember that bear markets do lead to bull markets, and if we look at data going back to 1950, the average bear market has led to a return of minus 34%, but the average bull market has led to return of 167% just to put things into context and it kind of really highlights some of the dangers of trying to time the market, particularly when a lot of the bad news is already beginning to be priced in.

[00:04:21] Sheldon MacDonald: Thanks for that Nathan. Another area where it was positive and perhaps the market has moved over the worst is China, where we see some restrictions easing. We had their PMI indicator rebounding back to above the 50 level and the market there responding as well with some positive moves in China and really just a reminder diversification does work in markets.

[00:04:43] Sheldon MacDonald: It may not have felt like it in the last few months, but diversification, really the name of the game, you know, stay diversified and stay invested the cardinal rules. Looking at the week ahead, I mentioned earlier, the ECB talking this week. We'll also see Fed minutes.

[00:04:58] Nathan Sweeney: Yeah, so people are gonna focus on the Fed minutes. So what are central banks thinking about the current environment?

[00:05:03] Nathan Sweeney: We are seeing signs that inflation is beginning to roll. So what will the Fed have to say about that? Will they be concerned about recession? So will the narrative change from inflation to recession an important thing to watch out for this week.

[00:05:18] Sheldon MacDonald: Yep. We also get the jobs report, that'll be closely watched. One of the big fears that the Fed has is that the jobs market has been too hot.

[00:05:26] Sheldon MacDonald: And of course, we'll start to see the first companies reporting earnings for the first half of the year. Those will also obviously be very closely watched to look for signals as to how companies have been able to navigate these difficult times.

[00:05:39] Sheldon MacDonald: So lots going on. As we said earlier, the narrative moving from inflation to a recession, but as I said, plenty, going on plenty to keep us interested and we hope to bring you more next week. Thank you.

[00:05:49] Nathan Sweeney: Thank you.