We return to a dose of reality

And we are back. The first quarter was a strong one for equities, as we know; the last month was pretty good for all asset classes; equities, bonds, and commodities all made gains. Optimism was running high, sentiment bullish, hopes were high, and inflation was back on track to continue the downward trend. The US economy was slowing but not too much, and the soft landing was almost a given. The S&P 500 was heading for another high, analysts were pushing up their forecasts for the year-end number, and the Dow Jones looked like breaching 40,000. There were even signs, for the first time, that leverage had entered the marketplace. The vix fear index remained close to historic lows.

Friday’s Personal Consumption Index did not shock like January’s, but there was a modest uptick again in February. The January spike means that prices for core services ex-housing rose at a 3.7% annualized rate in the three months to February, compared to the previous three months, the fastest increase on that basis since last May. On the consumption side, there was an uptick leading to upgrades in consumption growth. The bottom line is that the economy remains resilient, and possibly getting US inflation back to target took another if more modest, dent. Then, on Monday came the US monthly PMI survey for Manufacturing for March, which reported a further recovery in US manufacturing as the index ticked again back above 50, indicating expansion. The bond market did not like all this good news. As a result, US treasury yields rose across the board, and equities fell as the odds of a June rate cut were reduced. Having been close to a 70% chance a few weeks ago, the odds are now at best 50/50. Along with this news one of the “darling 7” fell further from grace as Tesla shares slid again on weak car sales. Perhaps after all we wont always be together in electric dreams.

We wrote a few weeks ago that the UK economy is showing signs of life again, and this positive stance was further enhanced as the latest money and credit data show consumer caution fading, which should support economic growth. It would appear the cost of living crisis continues to ease as wage growth continues to exceed prices. Mortgage approvals hit an 18-month high, and the hope is that mortgage rates will fall this year, which could help further boost the housing market. UK stocks are having a better time of it, with the FTSE 100 getting closer to 8000.

This takes me to another subject I meant to raise a few weeks ago after the budget, but the end of the tax year seems a good time to do it. It was a time when we usually look to take a few gains and realise some losses. There was a time when one could realise some of those gains tax-free or roll the losses into a new tax year. Not anymore. The Chancellor trumpeted the introduction of a UK-only ISA at the latest budget. So what does everyone do? Buy more UK equities, possibly but more likely move their existing UK holdings into the new ISA and buy more foreign holdings into their existing ones. If he really wanted to boost UK stocks and encourage further investment, and I know I am not the first to say this, just remove stamp duty. Also, we are now to be taxed further on second homes, and pensions continue to be raided. It would seem whatever government is in power working hard, creating assets and saving for a rainy day. The powers that be will want more of it.