In this week’s market review we will as always begin in the US, cross to Europe and Asia, and end up with a local Australian summary – bearing in mind that our market pretty slavishly follows those in the Northern Hemisphere, which had an up day on Thursday, and a down day on Friday.
Volatility continues to rage across most asset classes, and this is now having real world consequences on our superannuation, or pension savings, which in Australia are forced by Government. As we will see the losses are mounting up.
But first, it was a bad end to a wild week with U.S. stocks dropped on Friday as worsening inflation expectations kept intact worries that the Federal Reserve’s aggressive rate hike path could trigger a recession, while investors digested the early stages of earnings season. The previous day the stronger than expected inflation data showed inflation remained stubbornly high and this shocked the market into a volatile rise. But in the last session of a volatile week, equities opened higher, then reversed course after data from the University of Michigan showed consumer sentiment improved in October but inflation expectations worsened as gasoline prices moved higher. The median expected year-ahead inflation rate rose to 5.1%, above the 4.7% seen in September. A climb in inflation expectations, a closely watched metric by the Federal Reserve, comes just a day after data showed worse-than-feared inflation pressure.
“Yesterday you had this amazing, powerful intraday rally that was completely wrong,” said Phil Orlando, chief equity market strategist at Federated Hermes. “Then you look at the Michigan numbers this morning that’s consistent with what we’re seeing in the economy, and the stock market now is down to reflect that number. That’s correct.”
The latest edition of our finance and property news digest with a distinctively Australian flavour.
Go to the Walk The World Universe at https://walktheworld.com.au/
When JPMorgan Chase & Co Chief Executive Jamie Dimon said the United States and the global economy could tip into a recession by the middle of the next year, its time to adopt the brace position.
“These are very, very serious things which I think are likely to push the U.S. and the world — I mean, Europe is already in recession — and they’re likely to put the U.S. in some kind of recession six to nine months from now,” Dimon said.
He said the S&P 500 could fall by “another easy 20%” from the current levels, with the next 20% slide likely to “be much more painful than the first”. Runaway inflation, big interest rates hikes, the Russian invasion of Ukraine and the unknown effects of the Federal Reserve’s quantitative tightening policy are among the indicators of a potential recession, he said in an interview to the business news channel.
Earlier this year, Dimon had asked investors to brace for an economic “hurricane”, with JPMorgan, the biggest U.S. investment bank, suspending share buybacks in July after missing quarterly Wall Street expectations. In June, Goldman Sachs had predicted a 30% chance of the U.S. economy tipping into recession over the next year, while the economists at Morgan Stanley placed the odds of a recession for the next 12 months at around 35%.
“We continue to expect that the Fed will hike by 75bp in November, 50bp in December, and 25bp in February to reach a terminal forecast of 4.5-4.75%,” Goldman Sachs said in a note.
Fed vice chair Lael Brainard said Monday that a “second-half rebound will be limited, and that real GDP growth will be essentially flat this year.” The slowing growth, however, doesn’t appear to be dissuading the Fed from its path of monetary policy. “Monetary policy will be restrictive for some time to ensure that inflation moves back” to the central bank’s 2% target,” Brainard added.
After the rout of September, sorry to break this to you, but stock markets historically have experienced well-above-average volatility in October. It’s often a spooky month for stocks and several of the greatest crashes in stock market history have occurred during the month, including ‘Black Tuesday’ and ‘Black Thursday’ in 1929, as well as ‘Black Monday’ in 1987 and the worst of the 2008 financial crisis meltdown. Some have dubbed this the ‘October Effect’.
Guggenheim Securities Chief Investment Officer Scott Minerd said that he expects stocks to fall another 20% by mid-October, citing a connection between price-to-earnings ratios and inflation. “We should see stocks fall another 20% by mid-October…if historical seasonals mean anything,” Minerd said in a tweet.
The Fed has already raised its benchmark interest rate by 300 basis points this year as it fights to bring inflation back under control. And more hikes are expected. We will get more data of course, during the month, but one to watch is the feedback loop between U.S. stocks and bonds.
With the S&P 500 is down more than 20% on the year and showing no signs of hitting a floor, remember the valuation for the index remains elevated, and earnings estimates have only started to turn lower and may fall further as earnings season nears. Additionally, high yield spreads are widening, and volatility measures show that investors’ mood is complacent.
Go to the Walk The World Universe at https://walktheworld.com.au/
My latest Friday afternoon yarn with Journalist Tarric Brooker (@AvidCommentator on Twitter). We look at the latest ructions in the markets and ask what is going to happen next – what is below the waterline, with the help if Tarrric’s slides. Copies of the slides can be found at: https://avidcom.substack.com/p/charts-that-matter-30th-september
Last Friday the new British Chancellor Quasi Kwarteng unveiled £45 billion of annual unfunded tax cuts that sparked fears the national debt will spiral out of control. The measures included tax cuts, unfettered bankers’ bonuses and other incentives to drive growth.
Deregulatory packages for the financial-services sector, planning, agriculture, telecoms and childcare are only due after the party conference recess and before the Office for Budget Responsibility publishes its independent assessment of the public finances on Nov. 23. The government has said it will wait until the OBR forecast to publish its fiscal framework, which will be a combination of fiscal and growth measures. So all we got was a high-level pen picture, with no detail, and no forecasts. Which is why they did not call it a budget.
But not only was this a major shift from previous Government policy, but it triggered concerns it may be inflationary. Markets reacted badly, as we reported in our weekly wrap, and continued to drive bond yields higher (remember the inverse relationship between bond yields and bond prices – see my earlier show on bonds if you want to understand how these IOU’s work and are priced. https://youtu.be/aOZZPtxlMSQ
Long term bond yields rose significantly, as can be seen by the plot of UK 30-year bonds. And significantly, these instruments are used to price mortgages and cover exposures for pension funds, so they drive the momentum in the financial markets. So, no surprise on Tuesday, markets were roiled and continued their bear market slides, not just in the UK but around the world. The fallout was significant with people thinking the Bank of England would have to lift interest rates – perhaps up to 6% – and meantime many lenders stopped writing mortgages, while pension funds and hedge funds were forced to sell bonds as the prices fell, causing a self-reinforcing downward spiral.
Also, on Tuesday BOE Chief Economist Huw Pill said the bank’s program of government bond sales should go ahead as planned next week if the market repricing stays orderly.
Then On Wednesday we had a series of events which shocked the markets. First the IMF openly criticised the UK government over its plan for tax cuts, warning that the measures are likely to fuel the cost-of-living crisis. In an unusually outspoken statement, the IMF said the proposal was likely to increase inequality and add to pressures pushing up prices.
The IMF of course is normally dealing with developing countries, and applying a Neo-liberal philosophy seeks to cut spending, reduce debt and bring struggling economies back to health. Often financial help is predicated on them taking specific, and often unpopular measures. So, when the IMF specifically called out the UK for its policies, the writing was on the wall.
Not much later, the Bank of England announced they would be carrying out unlimited temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. They are seeking to stave off the crash, by unlimited purchases of gilts.
Is this a Lehman moment?
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants.
If you are buying your home in Sydney’s contentious market, you do not need to stand alone. This is the time you need to have Edwin from Ribbon Property Consultants standing alongside you.
Buying property, is both challenging and adversarial. The vendor has a professional on their side.
Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make.
Edwin understands your needs. So why not engage a licensed professional to stand alongside you. With RPC you know you have: experience, knowledge, and master negotiators, looking after your best interest.
Shoot Ribbon an email on info@ribbonproperty.com.au & use promo code: DFA-WTW/MARTIN to receive your 10% DISCOUNT OFFER.
This is an edited version of a live discussion about the current state of the markets with Head of Investments for Walk The World Funds and Nucleus Wealth, Damien Klassen.
Join me for a live discussion about the current state of the markets with Head of Investment for Walk The World Funds and Nucleus Wealth, Damien Klassen.
You can ask a question live.
Meet the Managers Forum Wednesday 19/10/22 6:30-8pm: https://www.eventbrite.com/e/meet-the-managers-tickets-410294761677?aff=wtw to register.
Go to the Walk The World Universe at https://walktheworld.com.au/
The next part of the John Adams quest in which we discuss how people are being ripped off by spurious investment schemes, and how the regulators are consistently asleep at the wheel. This is a problem not just here but in other western economies too. Investors beware!
Go to the Walk The World Universe at https://walktheworld.com.au/
An important discussion about the games banks are playing in relation to the setting of deposit interest rates, in the context of the RBA rate hikes. Steve Mickenbecker from Canstar and I explore the elements which are driving returns lower than they should be, and what we can do about it. Another case of the apathy tax at work! Steve Mickenbecker is in Canstar’s Group Executive Team, bringing more than 30 years of experience in the Australian financial services industry. As a financial commentator for Canstar, Steve enjoys sharing his expertise across topics such as home loans, superannuation, insurance, mortgages, banking, credit cards, investment, budgeting, money management and more. Go to the Walk The World Universe at https://walktheworld.com.au/
