June saw a continuation of the market weakness experienced since the start of the year. Global equities posted negative returns of over 4%, taking year to date losses for some major indices to over 20%, the widely used measure of a bear market. While drawdowns of this magnitude are generally seen every several years, the duration of the selloff, now lasting close to six months, is the longest since the global financial crisis.
Equity market weakness was once again driven by movements in bond markets and monetary policy expectations. High and rising inflation readings continue to spook investors and central bankers alike. The Federal Reserve met higher expectations, implementing a 0.75% interest rate rise with the Bank of England opting for another 0.25% increase a day later, taking headline rates to 1.75% and 1.25% respectively. Expectations for future rate rises have also increased, with further risks to the upside.
Over the month, fears of a significant economic slowdown, or recession, grew. Weakening consumer sentiment, persistent cost pressures for businesses as well as the unwinding of a major inventory build-up are all aligning to suggest economic weakness in the second half of the year. Equity investors are therefore beginning to focus on corporate earnings and the sustainability of these when margins are under pressure and demand is weakening. However, some positives have arisen with this outlook. Energy and other commodity prices have softened significantly, which, if they persist, will bring inflation down more rapidly than previously anticipated. Some are finding solace that this may ease the vigour of Central Bank rate rises, constrain the rise in bond yields and ultimately be supportive for equity valuations.
Underneath headline equity market movements there continues to be significant dispersion in the performance of sectors and individual shares. The news that previous market darlings such as PayPal and Meta (Facebook) are now considered “value” shares and will be represented in indices following such companies illustrates how far the market has rotated. It is likely that market favourites, as with overall market direction, will continue to be informed by monetary policy and bond yields.
With energy prices influencing many of the markets key concerns, movements in oil and gas prices will be closely monitored. A persistent drop has the potential to positively impact equity and fixed income markets. Furthermore, lower prices will quickly flow through into consumer budgets and business cashflows, providing a valuable stimulus to a flagging economy. Time will tell if futures market, that are currently pricing in oil prices 15% lower for the December delivery, are correct.
