Weekly Brief: How Markets Spent Their Summer Vacation

Weekly Brief: How Markets Spent Their Summer Vacation

over 1 year ago4 mins

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It’s soon going to be time to put away the flip-flops and wear proper shoes again, so as summer comes to an end, it’s worth taking a look back at what the markets’ wild ride might mean for the season ahead.

🕰 Recap

  • Back in July, Netflix announced stronger-than-expected second-quarter results
  • Data out in early August showed the US economy added more jobs than expected
  • And although the US technically entered a recession, economists shrugged it off
  • Instead, they focused on data out shortly after which showed US inflation came in slightly lower than expected

✍️ Connecting The Dots

Back in June, the S&P 500 took a plunge lower, entering an official “bear market”: investors’ focused on a looming recession and the downside risks of stocks missing second-quarter earnings estimates. By the end of July, updates from the largest US tech companies showed that, on balance, things weren’t quite as bad as feared (just yet, at least), which seemed to reassure investors that company earnings overall might hold up and that consumer spending, although squeezed, hadn’t been strangled.

Investors were encouraged: they started to buy the dip. Companies, after reporting results, either continued or upped their buyback programs. And with all that, stock markets seemed to be building up a head of steam. In summer, when a lot of investors are away on vacation, it doesn’t take as much activity to move markets. So soon, long-term investors like pension funds got more involved, not wanting to be caught out, and then retail investors followed suit en masse. Bullishness begat more bullishness, and mergers and acquisitions roared back to life, along with private equity investors looking for buyout deals.

The warning signs didn’t stop coming, though. US government officials made a visit to Taiwan and the inevitable Chinese response threatened yet another war. Tech companies announced hiring freezes and layoffs. China’s real estate market turned shaky. So did property markets in the rest of the world. Inflation in the US and UK hit new record highs. There was civil unrest with strikes at airports and railways, to name but two. The energy crisis in Europe sent gas prices even higher. There were droughts, and important rivers for trading goods dried up. Mostly, none of it mattered, or had already been reflected in prices. That is, until the stock market rally ran out of steam in late August, and things mattered again.

🥡 Takeaways

1. We are where we are, until we aren’t.

A lot still hangs in the balance. There’s a tug of war between central banks needing to hike interest rates to bring down inflation and the consequences that crimping demand will have. A recession feels all but inevitable (indeed by some technical measures, we’re already in one): housing transaction volumes are slowing, hiring freezes and job layoffs are increasing, and company profit forecasts are becoming more negative. Sure, it’s possible the US central bank engineers a non-recessionary slowdown, helped by high employment and high savings rates. And while a rising number of investors seems to be betting on that, the data still suggests those bets are being made by only the most optimistic investors.

2. ESG may come into its own no matter what happens next.

Russia’s war has brought to the fore the need for more sustainable, independent power sources: private and public markets are rushing to fund these alternatives. At the same time, global supply chains are shifting, whether that’s through Apple’s increased iPhone production in India (from China) or German chemicals giant BASF moving more fertilizer production to the US (where incidentally, gas is cheaper). ESG’s naysayers have argued that investors would abandon their environmental or social principles in a downturn, in search of profit. The jury’s still out, perhaps, but right now the Venn diagram of ESG and profit is looking more like a circle and could attract even more attention.

🎯 Also On Our Radar

The US housing market mightn’t be in as bad shape as some fear. In short: even though demand’s weakening, there’s still a supply shortage to be filled. Drops in demand have been focused at the top end of the market (as measured by credit scores), which is unlikely to lead to a jump in housing supply that’d knock prices down. And previous boom-bust housing cycles happened when more homes were built than new households formed – which isn’t the case this time. In fact, the opposite is true.



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