„He was a gentleman who was generally spoken of as having nothing a-year, paid quarterly.“ Surtees

Despite the rising cost of living in America, consumer confidence is rebounding and retail sales rose modestly month over month. Another sign the underlying US economy remains in reasonable shape, U.S. applications for unemployment benefits declined for the fifth consecutive week. Job openings increased in July after three months of declines. As a result of the continuing robust employment reports US 1-year yields have risen above 4%, as markets now price in at least a 75 basis point rise next week and possibly two further 50 basis point rises before the year-end. The US yield curve continues to invert as two-year yields rise above 30 years. The ten-year 1-year spread has fallen below the levels seen in 2007.

Bond and equity markets have suffered in tandem over the past 9 months, pretty much to a similar degree. On the plus side, those who do have cash on the sidelines are now seeing opportunities to deploy it in other asset classes, aside from equities to gain some income. Of course that makes equities less attractive as an investment class. But it also provides a good opportunity to recreate a balanced portfolio.

Economists generally expect US inflation to fall quite sharply next year, not quite to the Federal Reserve’s 2%, but certainly back below 3%.

There was some slightly better news on the UK economy as UK inflation surprisingly fell year on year, back below 10%, although the core figure did rise modestly. With the introduction of the energy price cap inflation rates are, as is the case with the US, now expected to fall sharply in the coming year.

Sell in May and go away, rarely works and so far this year it would not have cost you anything but would not have been particularly fruitful either. The S&P 500 is back below 4000 roughly where it was in mid-May. This is despite yields across the board rising. The Vix index is likewise roughly where it was in Mid May, equity sentiment remains bearish as fund managers hang on to cash and remain underweight equities according to the latest Merrill Lynch fund manager survey.

Ray Dalio expresses the view that US interest rates could climb to between 4.5% and 6% and stocks could decline another 20%. If one were to reach the top end of that range, the other would likely occur, who would argue with him? On the other hand, the US economy does remain resilient, as reflected in the continuing recovery in the Citi economic surprise index. Banks and consumer balance sheets are robust. Inflation expectations are falling, the market is now pricing in interest rates close to the bottom end of Mr Dalio’s forecast. The odds seem balanced between further corrections or a year-end recovery in stocks.