Sturdza’s team decodes central bank decisions.
After a sharp correction in June, the market largely recovered in late July, with the S&P posting its best July in almost a century. This recovery is largely the result of three factors: first, corporate earnings, which are widely heralded as fairly strong; second, the Federal Reserve’s tone as an indicator of a more dovish stance; and third, the historic stock pessimism recorded in June, pessimism that was likely at the origin of the extraordinary recovery.
We should also note that the release of a higher-than-expected inflation number in July, followed by a logical 75 basis point rate hike by the Federal Reserve, this time had no negative impact on the market, unlike in previous months.
Many investors listening to Jerome Powell’s press conference noted a propensity for more compromise:
- Does his view of the neutral interest rate and his “digital addiction” for the coming months mean that he sees the economic slowdown as evidence of easing inflation, implying that he will forgo usual rate hikes in the future?
- Does the fact that the economy is now in a technical recession mean that the cost of capital will stop rising?
The market has certainly already settled in with an inverted 2-10 year Treasury curve and a significant rally in ‘long-dated’ assets, particularly technology stocks.
On the other side of the Atlantic, the ECB faced its own set of challenges: rising inflation helped by a weak euro, peripheral government bond spreads reaching significant levels, a government crisis in Italy and a worrying deterioration in natural gas supplies beyond the old continent hangs . Ms. Lagarde responded with a 50 basis point hike and an intervention plan for government bond spreads, welcome news but one that did not fully allay investors’ fears about the complex situation in Europe.
Overall, reports from both central banks that they are relying more on economic statistics and financial numbers underscore the lack of clarity on the global macroeconomic front.
Stock markets were reassured by company results, which on average were quite reassuring. Big technology companies, which are crucial to the indices due to their weight, did not escape unscathed but showed resilience.
Overall, Alphabet, Microsoft, Amazon, and Apple’s results suffered from slowing growth rates, but without a catastrophic crash. Even Netflix, a major underperformer this year, was able to halt its underperformance after an improvement in subscriber numbers (above expectations). Meta continues to be impacted by both the shrinking advertising market and TikTok’s growing market share, with few quick fixes on the horizon.
While currency prices have impacted US-based multinationals, more than 80% of them have beaten their earnings forecasts and about two-thirds their sales forecasts. Although these numbers are lower than over the past two years, they remain above long-term averages.
As the market scrutinizes every word from Jerome Powell or the Federal Reserve, volatility remains in play: After a sharply bearish June, markets have rallied on hopes that the worst of interest rate policy will be “behind us”. The key point remains the balance between the degree of slowdown/recession eventually required and the direction of interest rates, with many other variables – including geopolitics – at play. Markets should continue to face tighter monetary policy and higher levels of inflation for now than the average. Such an environment underscores the importance of maintaining a defensive stance and focusing on companies that have demonstrated stability and economic resilience.
Consistent with our outlook, we remained active and sought investment opportunities in solid companies with an asymmetric risk/reward trade-off. In fixed income, we maintained a short duration bias with small exposure to IG corporates and blue chip issuers.
The views and statements contained herein are those of Banque Eric Sturdza SA, in its capacity as investment advisor to the Sturdza Family Fund, as at 05/08/2022 and are based on internal research and modeling. This notice is issued in Guernsey by EI Sturdza Strategic Management Limited, which is regulated by the Guernsey Financial Services Commission. EI Sturdza Funds plc and its sub-funds are Irish funds authorized by the Central Bank of Ireland. The funds are approved by FINMA for distribution in Switzerland. The Swiss representative and paying agent is Banque Eric Sturdza SA, rue du Rhône 112, 1204 Geneva, Switzerland. The prospectus, KIIDs, articles of incorporation, semi-annual and annual reports of EI Sturdza Funds Plc are available free of charge from the Swiss representative office. The information contained herein is estimated, unaudited and is subject to change. This content is for informational purposes only and is not intended as an offer or recommendation to buy, sell or otherwise apply for Shares in the Funds. More information can be found here; https://ericturdza.com/disclaimer/
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