Darkest before dawn they say
The recovery stocks made in the second half of August are looking shaky as higher bond yields are biting into US tech stock valuations. We noted earlier in the week that the rise in bond yields had started to impact the non-profitable tech companies’ share price performance, which is now filtering through to the larger cap names. Bond yields are rising again as the release of the monthly US ISM Purchasing Manager surveys recorded a bounce back in the service sector. So a little positive economic news is bad news for stocks apparently, as the continued resilience of the US economy once again pushes out the timing for when market participants expect the Fed will start to cut interest rates. The strong correlation between stocks and bond moves remains. More and more economists are apparently throwing the US recession towel in, now plumbing for the soft landing option.
The picture from the monthly Purchasing Manager survey for the UK was one that painted a slightly gloomier picture as both manufacturing and services sectors appear to be contracting. The composite index was revised slightly higher to 48.6 in August from the earlier estimate, but a reading below 50 is considered to represent an overall decline in economic activity.
The UK generally feels in a pretty poor place at present, strikes continue, wages are rising, and fiscal and monetary policies are restricting economic activity. Local councils going bust, as some of our schools appear to be at risk of falling down around the pupil’s ears. Even expectations for our rugby team at the upcoming World Cup are at a low ebb. Much of the gloom is reflected in stock valuations, many UK-listed investment trusts trade at significant discounts to their NAVs. The FTSE 100 trades on one of the lowest multiples of developed markets. Could the picture start to change as the next General Election, still some time away I would agree, looms on the horizon? One can see the ground is already being laid.
The Labour party are distancing themselves from the idea of a wealth tax and starting to reign in some of the pledged spending plans previously discussed. With recent developments would imagine the idea that a tax that could put a further burden on the state education system, must now be under review. The Conservatives will most likely follow suit, pledging tax cuts to attempt to woe back disgruntled voters. UK inflation rates have been falling and wages rising. The Bank of England expects inflation to fall year on year to 5% by the end of the year. Assuming that will be wrong as the country’s economic forecasters are pretty hopeless, but anything close to 5% will result in employees’ wages growing in real terms and a possible easing of the “cost of living crisis”. The Bank of England is starting to make noises that interest rates have peaked, and as a result, banks are starting to lower mortgage rates.