Mark Lister is Chief Investment Officer at Craigs Investment Partners. Photo / Provided
After a very difficult first half of 2022, global equity markets staged a strong comeback in July and most of August.
While it was nice to see the optimism returning, the road ahead was still going
We got a taste of that last Friday, when Federal Reserve Chairman Jerome Powell reminded financial markets that the central bank was not done yet.
He poured cold water on the suggestion the Fed would backtrack anytime soon, noting that restoring price stability would require “a restrictive policy stance for a while.”
He added that while higher interest rates will reduce inflation, they will “also cause suffering for households and businesses”.
It saw the Dow Jones Industrial Average fall around 3%, the fourth worst day in two years. The weakness continued into the past week, stopping a two-month rally in its tracks.
At one point in late June, the S&P 500 in the US was down 23.1% for the year and our NZX 50 index was down 18.8%.
We then saw a very strong rebound from June to the end of August, with the US market rebounding 17.4% and the local market rebounding 11.9%.
Stock markets have given back some of that over the past fortnight, although prices are still well above June lows.
US stocks are currently down 16.4% this year, while the local market is down 10.6%.
If we take into account the favorable movements of the New Zealand dollar (a weaker currency boosts the performance of international markets), US equities are only down 6.9% in 2022.
Ironically, signs of slowing economic activity helped fuel more upbeat sentiment in July and August.
Cracks in the global economy were seen as good news, as it would deter policymakers from acting too quickly for fear of causing a downturn.
It’s starting to look like wishful thinking, with central banks focusing more on managing extremely high inflation.
A weaker global economy could simply add additional risk to the equation, rather than giving policymakers an excuse to change course.
There are encouraging signs on the horizon, so it’s not all bad.
Commodity prices have fallen from their highs, corporate pricing intentions have stopped deteriorating and congested supply chains appear to be unfreezing.
The international reporting season has been heartwarming, with many quality companies delivering resilient results. Most of the earnings releases we’ve seen across the NZX in recent weeks have been similarly strong.
Nonetheless, the time is right for caution and diversification, and investors would be wise to focus on quality assets and reliable income generation, with a defensive orientation.
For us here in New Zealand, September marks the start of a new season and much better weather. However, since 1950, it has traditionally been the weakest month of the year for US stocks, by some margin.
That said, it is also a precursor to what has traditionally been the most lucrative time of year for investors. November and December were the two strongest months in the last 75 years.
For now, it looks like caution should prevail. Powell’s speech a week ago was a timely wake-up call for optimistic markets, and it could be an opportune time for investors to do the portfolio spring cleaning they’ve been putting off.
Mark Lister is Chief Investment Officer at Craigs Investment Partners. The information in this article is provided for informational purposes only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making an investment decision, Craigs Investment Partners recommends that you contact an investment advisor.