Happy Easter everyone
As we embark on a new month and quarter, the past 3 months have been a tale of two halves: the first two months were marked by euphoria, followed by 5 consecutive weeks of down markets, leaving the MSCI world index down circa 4% in sterling on the year. Even the safe haven of gold was down almost 15% on the month. Sentiment has shifted from fear to greed, as bond investors fear a resurgence of inflation and equity investors fear a recession amid rising oil prices stemming from the US-Iran conflict.
Despite Wall Street having its best day since Trump rowed back on his China tariff announcements this time last year, one can paint a fairly dark picture for the months ahead, as my colleague did on our weekly team call. Even my blog on Monday wasn’t the most joyous thing, but on reflection, I want to strike a more optimistic note as we enter the 2nd quarter.
Much has been done to compare the similarities between now and the Russian invasion of Ukraine, but there are also many dissimilarities. At the start of 2022, interest rates were zero to all intents and purposes, unlike today, when the Fed funds rate is 3.75%. US core inflation, which excludes volatile food and energy costs, had already risen to 6%. The UK was experiencing similar headwinds, with headline inflation running at a similar level. Central banks had no option but to raise interest rates dramatically, finally peaking at 5.5% in mid-2023. Despite higher commodity prices and interest rates, the US economy still grew modestly by 2% in 2022.
Today, interest rates are not at zero, so there is less pressure to raise them. Inflation is far closer to the 2% central banks desire, a long way from the 10% it peaked at in 2022, and at present not forecast to get close to that. US consumers still have the benefits to come through of the big, beautiful bill. AI-driven growth is still on the agenda, and should oil prices stabilise, we may even see talk shift from higher rates to a possible cut, as central bankers return their focus to economic growth and view the inflationary impact of higher energy prices as transitory. The move in oil prices, when viewed in real terms by adjusting for inflation, is not as dramatic as some other times in history.
Markets have significantly derated valuations, as the S&P 500’s earnings ratio is down over 15% from its high, already part discounting an economic recession. Over half of the stocks in the Russell 2000 are down by more than 20% from their lows. We had a 20% fall in the S&P 500 last April; never in history, according to Gemini anyway, has the S&P 500 fallen 20% twice within a 12-month period. Food for thought anyway. Happy Easter every one.
