Hedley June Market Commentary

The 2nd quarter of the year saw beaten down growth names, and technology in particular, make a broad comeback as the promise of the development of artificial intelligence lifted major technology stocks to new heights. This was reflected in the NASDAQ technology index having its best start to a year since 1983 with a gain of 31% year to date. For the 2nd quarter, the S&P 500 gained 6% in sterling terms, with Japan the only other major index recording a gain, of 3.5%. Elsewhere, both UK and European equities fell around 1.5% with bonds bearing the fallout of rising interest rates and gilts losing 6.5%.

On the economic front, inflation is the main focus of global markets with investors fixated on any data which may affect the ongoing rate. The news on this front is mixed, with the UK, in particular, having a difficult time getting this under control while recent data from the Eurozone suggests that the inflation rate there has now dipped to 5.5%, with similar readings in the US. Although this is moving in the right direction, the readings are still well above the central banks’ targets of 2% so there is still some way to go to bring this under control.

However, comparisons should get easier as the months move on but many economists predict that, nevertheless, it could prove difficult to bring inflation down to target levels anytime soon and we may have to live with slightly elevated levels for some time. The positive news is that employment remain strong so, although this is also part of the problem, the consumer is still able to spend. Conversely, the chances of recessions in Europe or the US remain high as the cost-of-living pressures continue but any downturn is likely to be shallow, which is why equity markets, in particular, remain reasonably robust. There are also some who hope for a mild recession as it would take away the pressure for central banks to do more and possibly make more damaging policy mistakes.

As a result of the still elevated levels of inflation, interest rates are likely to be increased still further with market commentators looking for perhaps an additional 1% in the UK and 0.25% to 0.5% in the US and Europe with central bankers continuing with their tough narratives. In fact, we have witnessed one of the most aggressive rounds of interest rate increases by western central banks in history, with The Federal Reserve increasing rates at every meeting since March 2022, a span that included four straight three-quarter point moves, before taking a break in June. However, while we are unlikely to see any respite from higher interest rates in the near term, it does look as though interest rates are at least approaching their peaks and although any decreases can be ruled out over the short and medium-term, financial markets are likely to exhibit an element of relief once the tightening cycle is at an end.

On the geopolitical front, the war in Ukraine shows no sign of ending but the recent unrest in Russia displays how quickly events could turn. Similarly, concerns over a China/Taiwan confrontation have eased for now but could well reignite over coming months and years. Any good news from these situations would certainly have a positive impact on financial markets.

We have seen a very mixed first 6 months of financial performance from markets. Technology has performed extremely well and while very concentrated, it has propelled the broader US index forward and to some extent, the Japanese indices. Other developed markets have produced more subdued performances with much of Europe showing some gains but the UK still lagging behind and emerging economies are a little higher. Fixed income markets are looking much more attractively priced at these levels and are already discounting higher interest rates. Moving forward, much will depend on inflation and by extension interest rates but once these look to be peaking then markets could react much more positively.