US market insight July 2023

Market insight July 2023 shows that it was a positive month for growth assets, with the majority of major indices ending in positive territory. One of the main reasons for this was due to data from the US, the World’s largest economy, supporting what is being called a ‘Goldilocks’ soft-landing scenario.

Here, the economy slows down but does not actually go into reverse. The jobs market does not suffer, but inflation is tamed. Importantly, the most recent inflation reading in the US, in June, was just 3%, only just above the Fed’s target of 2%.

One of the main reasons the US economy has performed better than expected, despite interest rates still yet to peak, is that many US consumers are still protected via low, long-term mortgage rates which became available after the Covid pandemic and so they are not yet really feeling the pain of the current rate environment.

It is also worth remembering that growth asset returns so far this year in the US have been driven by a handful of technology stocks, so the markets remain sensitive to any short-term news flow from this basket of companies.

UK market insight

In the UK, growth assets also had a positive month following a surprise decline in inflation from 8.7% to 7.9% in June. Sectors such as house-builders stand to gain the most from lower interest rates and if the peak for rates is sooner than expected, this may be a turning point for the valuation in UK shares.

However, it is worth noting that core inflation continues to remain sticky and more confirmatory data is needed to support the view that UK inflation is under control.

Japan inflation

On the other side of the inflation story, Japan persists as the world’s only central bank that has negative interest rates. However, the Bank of Japan now needs to rethink its ultra-loose monetary policy, as inflation is finally increasing after many years and is now higher than that in the US at 3.3%.

In terms of factor performance in July, it was small cap and value that led returns at the expense of the growth and momentum factors.

Defensive assets

Moving to defensive assets, the disconnect between what bond and equity markets think about recession probability continues. The US 10-year treasury yield continues to hover around the 4% mark and an inverted yield curve remains (where 2-year returns are higher than 10-year), which is still considered a barometer for impending recession.

Market insight July 2023 – in summary

In summary, the key challenge for markets as we go through 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.

If you would like to speak to our investment team about your investments, please get in touch.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Ian Hooper

Chief Investment Officer

Ian joined Progeny Asset Management as a founding director in 2016 and provides strategic oversight to the business.

Learn more about Ian Hooper