June Market Commentary

Commentary by Cube Capital Limited – A Thornbridge Appointed Representative

Looking to the second half of the year, there are some signs inflation could be peaking in the US in the coming months. June’s manufacturing PMI report underlined this view. Shipping rates are falling, metal prices have fallen sharply in the first half of the year and recently even some soft commodity prices have corrected. Oil too has fallen around 10% from its highs. Economic data continues to create volatility, last week the unexpected drop in consumer inflation expectations sparked something of a rally only for a weak consumer report at the start of the week to cause a setback.

The pattern over the summer may continue to be a more volatile time as many portfolio managers are on holiday and liquidity remains thin. The upcoming earnings season will more than likely be crucial to the summer months as well. Earnings expectations have been lowered however corporate earnings are still expected to grow year on year.

At the start of the month we reported the negative sentiment for most asset classes, this remains the case as macro strategists remain cautious for both bonds and equities. Unlike the start of the year the view is becoming more consensual.

There may be reasons to be slightly more optimistic for the second half of the year.

US stocks have corrected largely in response to rising interest rates and now look better value. The equity risk premium, based where longer dated bond yields currently stand is now closer to historic averages. That does assume companies can meet their upcoming earnings expectations. As we noted inflationary pressures appear to be easing, particularly US ones and this may in turn encourage the Fed to turn more dovish as the year progresses. The other point worth noting is corporate, personal and banking balance sheets are generally much stronger than they historically at this time. Although there is much talk of a likely economic recession in the US, stocks tend to get there before analysts.

The balance between the performance of the US dollar, bond yields along with corporate earnings, economic indicators and the outlook for Federal Reserve policy will continue to dominate investor sentiment.

I heard a wonderful phrase the other day; “Bear markets are when you make the money, you just don’t realise it at the time.”

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