Investment returns (before tax and fees)* for the quarter ending 30 June 2023 are:
* rounded to one decimal place.
Economic growth has been somewhat sturdy as we report on another positive quarter. In our mind, there are two key questions in the market at this point.
Will interest rates rise further from here?
Reductions in energy prices (e.g. oil), easing supply constraints, and reduced spending on goods have all contributed to a reduction in headline inflation. There are some lingering concerns around the pricing of certain services such as costs of travel, hospitality, wages, and food. However, central bankers around the world have managed to, for the most part, cool inflation in a red-hot economy.
Are share prices today correct in anticipating a rosy future?
Share and bond markets have very differing views today about future outcomes. Share investors are optimistic, feeling the worst has passed and better times are ahead. However, bond investors are cautious because of their concerns about inflation.
Share investors feel optimistic largely because share prices have increased significantly in the past year. For the year ended 30 June 2023, the prices were up for indices such as the USA Dow Jones (12% price increase), S&P 500 (18% price increase) and NASDAQ (25% price increase). There has also been the belief that the gains from artificial intelligence (AI) may be significant, especially for some technology companies.
At the same time, share investors may feel that the market is currently experiencing some form of stability. The VIX, an index that measures the expected volatility in share prices, is reporting that the stock market expects to be half as volatile compared to what it reported in October last year.
Bond investors remain cautious, given that interest rates have risen strongly in the past year. There is still considerable uncertainty about whether central banks will raise rates further. Whilst headline inflation (the rate reported by the Consumer Price Index) has reduced, domestic inflation (which mainly considers housing, transport, medical, electronics prices etc. and does not include food and energy prices) remains stubbornly high and of concern to central banks.
While we are reporting on another positive quarter, there is a sense that investors are not all in agreement in their feelings about the market at this point in time because there are plenty of reasons to be both optimistic and cautious.
We think interest rates could rise further, and shares come under pressure at these levels. We remain cautiously invested, diversified and continue to hold higher-than-normal amounts in cash.