Calm Before the Storm?
An eerie calm has fallen over markets in recent weeks, as the banking stresses of early March fade into the background. Market measures of risk, such as volatility, have retreated, while global equity markets have rebounded strongly, buoyed by a resurgence in technology stocks.
In Australia, 2023 has started very positively for the ASX 200 Index and it is up 4.5% year to date. This is despite continuing rate increases from the Reserve Bank, and at the end of the second quarter the consensus view is that there will still be another two rate hikes before the terminal rate is reached.
In the US, the S&P 500 Index has gained 13% this year, recouping the 2022 downturn since the Fed kicked off its cycle of rate hikes last March. The index is also up 22% from its October closing trough, leaving it above the threshold of what’s considered a bull market. However, nearly all the gains have come from the big stocks in the Nasdaq 100 Index, which is poised for its best opening six months ever, with a surge of 36% erasing last year’s 33% slump.
The bond market has been focused on the growing risk of still higher rates and the US yield curve continues to suggest a recession is imminent. A surprisingly resilient economy gives warning that the job of beating inflation is far from over as data shows that while inflation is coming off its highs, the economy is still growing at a faster-than-expected pace. Central banks in Australia and the northern hemisphere are expected to continue to raise official cash rates despite the increasing risk of recession.
Equity and bond markets are sending mixed messages. The equity market believes that the terminal rate for this cycle of tightening is close, and that as inflation continues to decline the economy will gradually slow to a soft landing. Bond markets also believe the terminal rate is close, but the inverted yield curves in Australia and the US suggest that a hard landing may be in store. There remains uncertainty about the lagged effects of tightening so far and the extent of credit tightening in the US resulting from banking stresses earlier in the year.
The exuberant equity market and low volatility may just be the calm before the storm.
Market Overview
- In the last quarter Australian and Global Bonds have underperformed cash, as yields have inched higher as traders raise their estimates of the terminal rate
- Despite low volatility, the Australian equity market has been relatively flat over the quarter, although the 12-month return is a healthy 14.6%
- The Developed Markets are the best performing asset class in the quarter, mainly due to the rebound in the Nasdaq-listed tech stocks
- The strong USD resulted in the depreciation of the AUD, so that a hedged exposure to global shares underperformed an unhedged exposure
- The high USD and the slower than expected recovery in China post the pandemic lockdowns is weighing on the Emerging Markets
- Australian and Global REIT’s have been hit particularly hard by rising interest rates and have underperformed the broader equity market over the last year
Australian Factors
Factors are very volatile over short time periods. Looking over the course of the last 12 months, value stocks out-performed growth stocks by 4.7%, as lower relative price companies on average did better than higher relative price companies. However, smaller companies have under-performed the broader market by 2.5%.
Global Factors
The US makes up around 65% of developed markets, and the extraordinary performance of the large growth tech stocks in the Nasdaq has resulted in global growth stocks significantly outperforming global value stocks, and global large caps outperforming global small caps.
If you have any questions about your investment portfolio or any other financial and wealth management matter, please contact us on +61399350970 or email admin@warrhunt.com.au if we can be of assistance.