July gains
Global stock markets continue to hold on to their huge July gains, albeit without setting the world on fire.
Although central banks are still hiking interest rates, the latest being the Bank of England's 0.5 percentage point increase overnight (more on this below), US and Australian bond yields continue to fall… a positive for markets.
After having hit 4.2% in mid-June, the Australian 10-year bond now stands at 3.1%, and is a significant reason as to why the S&P/ASX All Technology Index (ASX: XTX) has roared 25% higher in just the past three weeks.
With gains like that, it's no wonder markets are pausing for breath, especially given the ASX reporting season is just around the corner.
The lower the interest rate, the cheaper the money. And the cheaper the money, the higher the stocks.
US leads the market
Whilst ASX results will be important on an individual company basis — sending stocks up or down largely based on their future outlooks — the overall direction of the stock market will be determined by what's happening in the United States.
As ever, in these unusual days of sky-high inflation, all eyes remain on the US Federal Reserve and its pace of interest rate rises.
Commenting on Bloomberg, Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, said, "there's an intense tug-of-war happening in the economy and markets."
"On one side, you have a narrative that reasonable growth is going to support continued inflation pressure and keep the Fed hiking. The other narrative is that slowing growth is going to ease inflation and allow the Fed to stop hiking."
I'm playing both sides, as you'll read further down…
Instability and high inflation in the UK
The United Kingdom looks to be in a mess.
Never mind temperatures recently reaching 40 degrees celsius for the first time ever (brutal for a country with virtually zero air conditioning)…
And a period of political instability following the resignation of Prime Minister Boris Johnson…
Overnight, the Bank of England increased its inflation forecast to a whopping 13.3% for the fourth quarter, predicting it will still be around double-digit levels in a year's time.
13.3% inflation!!! Imagine what that could do to the price of an iceberg lettuce.
This came after the central bank raised its base rate by 0.5 percentage points at the same time as predicting the UK economy was on course for a period of stagflation – a recession combined with a soaring cost of living.
The Financial Times said: "Britain faces a protracted recession and the worst squeeze in living standards in more than 60 years."
Yet, the FTSE 100 took the blow in its stride, finishing flat on the day's trade. In fact, over the past 12 months, the country's benchmark index has gained 4.6%.
Never more true is the saying the stock market is not the economy. Still, there are undoubtedly tough times ahead for the 67 million inhabitants of the United Kingdom.
Have we reached the bottom?
With each passing day of the US earnings season, speculation is growing that stock markets have bottomed.
Big tech names such as Alphabet, Apple and Microsoft reported earnings at least in line with expectations, something that in these beaten-down markets has been enough to send stock prices higher.
Having at one stage fallen 29% in 2022, the Apple share price has jumped 27% higher in the past 3 weeks. Not bad for a company with a market cap of $US2.66 trillion.
So was mid-June the market bottom?
I'd put the odds at say 70/30 in favour of yes as it feels like the current batch of interest rate rises in the US and Australia are having the effect of slowing inflation.
The alternative — the stock market falling back below its June 2022 lows — is encapsulated by comments in the latest Totus Alpha Fund performance update:
It takes time for the impacts of high inflation, higher interest rates and lower liquidity to feed through to the economy and asset prices. Central banks have been crystal clear in their warnings about inflation and the only tool they have to control it is asset prices.
At some point central bankers will have to reverse course and stimulate but if it is after a recession then history suggests that the starting point for asset prices will be lower.
Totus are acutely aware of their reputation as "perma bears," yet are ready to add to their favourite high-quality companies on any further bouts of stock market weakness.
Being a glass-half-full person, I always look at times like these as opportunities.
If the market keeps rising, your portfolio benefits, and also it indicates better times ahead (albeit some months ahead) for the economy.
If the market does indeed test its June 2022 lows, it gives you an opportunity to snap up some more bargains. I was very active — especially at the smaller end of the market — during a time which I thought was characterised by indiscriminate selling, likely tax-loss related.
I've got cash on the sidelines, ready to go again. Roll on ASX earnings season, where I'll find out if I backed the right horses. Giddy up, investors.
