Market insight, August 2023
In our market insight for August 2023 we see it was a tough month for growth assets, with the majority of major indices ending in negative territory. The last trading week of the month saw markets recover from the month lows, but not enough to claw back the lost ground.
At the lowest point in August, Global markets had lost around $3tn in value as gloomy Chinese economic data, and surging US borrowing costs soured investor sentiment. In recent weeks bond yields rose in both the US and UK, squeezing equity valuations. This has weighed on the Technology sector, a sector which has driven the market for much of 2023.
The so-called “Magnificent Seven”, including Amazon, Apple, Microsoft, Meta, Nvidia, Tesla and Google parent Alphabet, all suffered their first three-week net losing streak this year.
The Fed and US market
The eyes of the world turned to the Fed’s annual economic forum in Jackson Hole, Wyoming where Fed Chair, Jay Powell has warned that inflation “remains too high”.
This raised the prospect that the Fed was prepared to raise rates further if appropriate, and highlighted the fact it intends to hold policy at a restrictive level until it is confident that inflation is moving towards its targets.
Headline US inflation, measured by the consumer price index, was 3.2 per cent for July, which is down from its peak of 9.1 per cent, yet sits above June’s rate of 3 per cent. The fed continues to keep maximum flexibility when it comes to policy actions moving forward.
The central bank is now not only focussed on the risk of tightening monetary policy too little and allowing inflation to become entrenched, but of raising rates too high. Doing too much could also do unnecessary harm to the economy and it remains a fine balancing act.
The UK market
In the UK, growth assets followed a similar path to their global peers. The latest update from the Office for National Statistics puts the CPI measure of inflation at 6.8% in July, down from 7.9% the previous month. While this is down from the 41-year high recorded in October – the figure remains painfully elevated.
Factor performance and defensive assets
In terms of factor performance in August, small cap and value were the hardest it, whilst Quality eked out modest gains.
Turning to defensive assets, over the month we saw bond yields nudge towards 14-year highs following the higher for longer central bank narrative.
A stronger economy, and the associated risk of a second inflation wave, means interest rates may well stay higher for longer, and so markets are revising their expectations.
Market insight summary
In summary, the key challenge for markets as we leave the third quarter, is to navigate through the data to finally see a peak in the current interest rate cycle. Until this is clearer, market volatility will remain. Therefore, as ever, retaining an appropriate level of diversification across asset classes, regions and styles remains key to avoiding the potential pitfalls that could emerge at any point.
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