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The Macroeconomic Summary

We are halfway through 2023 and the bears are looking worse for wear with the Nasdaq up 32% and the S&P 500 up 16% year to date. Despite much higher interest rates and declining quarterly corporate earnings in the US markets, technology stocks and specifically stocks related to artificial intelligence, semiconductors, and cloud computing, have done very well. With this rush to technology growth stocks, the traditional defensive market plays have taken aback seat.

The first three months of the year were marked by considerable uncertainty and market volatility as investors
pondered the course of inflation. The markets continued to speculate that the US Federal Reserve would hike rates by a final 25 basis points in May before cutting rates later in the year. The US jobs market remained robust in April to provide little respite to inflation on the wages front.

In May, the US Federal Reserve enacted its tenth consecutive rate hike to take the target of the Fed Funds rate to 5.25%, 500 basis points (“bp”) higher than where the tightening cycle began in March 2022. Higher interest rates are starting to bite and we’re seeing the global economy slowing as monetary policy remains restrictive in an environment where inflation is slowing but remains too high.

The market stand-off with central banks continued in June with equity markets edging higher despite increasingly restrictive monetary policy. Central banks moved with a “hop, skip and a jump” in June as policy makers responded in their own way to their domestic inflation scenarios. The US Federal Reserve Bank chair, Jerome Powell, was adamant in his testimony to Congress recently that they had never used the word “pause” in their policy statements, but the Fed nevertheless chose to “skip” another rate hike in June. In contrast, the European Central Bank increased rates with a “hop” of 25bp in June with the Bank of England instituting a “jump” of 50bp (see chart below).

At the quarter’s end, there was still no dramatic economic downturn in sight, inflation remained sticky, and the Fed was expected to push rates still higher and keep them there for longer.

With the earnings season for the second quarter set to kick off in mid-July, expectations are for a 6% decline in earnings from a year ago. From the next quarter onwards, however, earnings are expected to improve, with even greater growth in 2024.

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About the Author

Nicholas Pittaway
Portfolio Manager, Sasfin Wealth

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