Markets are rallying on underappreciated good news. We continue to favor staying invested, with potential opportunities in global equities and fixed income.
The old adage “bad news sells newspapers” remains true across old and new media. Unfortunately, that comes at a cost for investors. By focusing on what may go wrong, investors may be missing what is going right and what an improving set of circumstances means for investing in the future. This past week, there were important pieces of good news that collectively indicate improving prospects for the US economy, even in the face of the Fed’s most recent rate hike. The balance of this data suggests “normalization” rather than more disruption. It is only natural for markets to rally on this news. With it, we continue to see broader opportunities in staying invested. The ”good news”:
Evidence of US economic resilience is mounting. US real GDP growth accelerated to a 2.4% annualized pace in 2Q2023, led by a bounce-back in business capital spending.
US inflation continues to fall. For example, the rate of growth in US services prices ex-shelter slowed from a peak of 8% to 3%.
Fed Chairman Powell indicated that if inflation is falling and the labor market is cooling, there will be no need for monetary policy to force the economy into a full-blown recession. While we believe the progress on underlying inflation measures appears underrated by the Fed, Powell indicated the Fed could back off restrictive monetary policy in the coming year without a collapse in labor markets.
Markets are looking past this period of “restrictive” monetary policy as the Fed is viewed as unsustainably tight. Yet, high-grade bond yields are near 20-year highs. This presents an unusual opportunity for investors to potentially capture and retain “real yields.”
Several US tech titans reported better-than-expected quarterly profits, reflecting the resilience of their “old economy” businesses. Most of the initial 2Q earnings news supports an improving set of equity market opportunities.
China’s policymakers are coming to grips with the loss of momentum in its economy and moving away from half-hearted measures to stabilize the property sector.
Japan moved very incrementally again to tighten monetary policy in the last large economy to retain a zero short-term interest rate policy. The Bank of Japan will allow a small rise in long-term bond yields below a maximum of 1%. While the news created fear in global bond markets last week, it’s not significant enough to derail global markets or stem a generational change in Japan.
After the joint stock/bond collapse of 2022, sidelined investors have chased markets higher. However, only now is the world equity market “broadening” its strong performance beyond a few mega-cap shares. Not every risk is behind us, but signs are building that the world economy can transition from a period of slow growth and high inflation to a more sustainable expansion.