July was certainly not a quiet month
Lots happened, much of it negative and yet equity and bond markets went up! It reminds me of something I talk to clients about: while the long-term markets are driven by fundamentals, in the short-term fundamentals are often overshadowed by behavioural factors. This leads to markets often going in the opposite direction to what you might expect. Easy to feel like you’re being whiplashed when you have conflicting data or conflicting interpretations of the same data!
Here are a few of the big news items in July:
- Mario Draghi resigned as prime minister of Italy. Johnson was forced out in the UK.
- A surge in tourism boosted the eurozone economy more the expected in quarter two. However, looking forward, the International Monetary Fund revised down their 2022 and 2023 growth forecasts for the world to 3.2% and 2.9% (from 3.6% for both years just 3 months ago) amid increasing economic headwinds.
- Recession fears continued to increase. In the US the yield curve inverted – for many a classic signal that bond markets are concerned about recession risk (see graph below). The US economy contracted for the 2nd quarter in a row so could be regarded as technically in recession (although the US uses a broader definition of a recession, and it did have very strong jobs growth in July).
- The quarter two earnings season is almost complete. Companies are pulling down their forward earnings guidance but not by more than might have been reasonably anticipated.
- Inflation numbers continued to increase. The eurozone inflation hit a new high of 8.9% in July.
- As a result, the ECB surprised with a 0.5% increase in interest rates versus the 0.25% increase it had signalled just weeks beforehand.
- Meanwhile the euro area interest rate curve actually came down, except for the very front part of the curve which went up to reflect the 0.5% increase in short term rates. See graph below which shows how the rate curve has moved from the start of the year to mid-June and then from mid-June to now.
The net result of all this activity is that equity and bond markets went up in July. However, year to date investors, in most cases, are still nursing losses.
In summary
We have high inflation and central banks are struggling to get it under control. Interest rates are going higher with the first move in the Euro area now behind us. Economies continue to slow, and the chances of recession are increasing.
Despite this equity markets have gone up strongly in recent weeks. Is this just a bear-market rally, with further falls to come? Who knows? Our best guess is to expect continuing market volatility. For short-term investors, this is not a market to be in but for our clients who are long-term investors, we continue to advise them to follow their plan and use market weakness to build on positions.
John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.
If you would like to understand how Acuvest helps investors and pension fund holders to minimise the impact of charges on their pension funds, please contact Aengus Moran, Investment Advisor, on 01 634 4807 or email directly at aengusm@acuvest.ie.
