Q3 Market Review

The year so far…

So far in 2023, markets and portfolios have generally been in positive territory, clawing back some of the previous year’s declines but still dominated by inflation. Inflation and interest rates remain a persistent problem for both equity and bond markets alike but there is some evidence inflation is starting to cool.

While the Bank of England raised the base rate to 5.25% in August, signs of slowing inflation allowed the central bank to keep rates unchanged in September. Each monthly inflation announcement is eagerly anticipated by investors trying to understand where the global economy is in the economic cycle and looking for indications that inflation is coming under control.

External factors continue to influence global markets

Regrettably, once again geopolitics has come to the fore. As the war in Ukraine rumbles on with varying degrees of Western support, the Israel-Hamas conflict has clearly escalated dramatically. Up until now, there has been no major stock market reaction to the turmoil in the region and the primary market concern centres on oil production.

Whilst neither Southern Israel nor the Gaza strip play host to major oil and gas infrastructures, any escalation of a wider conflict in the Gulf region could send oil price soaring, with the major concern being Iran, which has had its oil production sanctioned in recent years, controlling the Strait of Hormuz – a route that facilitates the transport of 15% of global oil supply.

Market Movements

During this year’s third quarter, the US economy continued to surprise in its resilience, with the labour market remaining relatively robust together with year-on-year core inflation measures easing. However, around 80% of the S&P’s return year to date is thanks to the performance of seven technology shares “the Magnificent Seven”. These are: Apple, Microsoft, Alphabet, Amazon, Tesla, Nvidia and Meta and excluding these, the US market has failed to gain any ground at all.

The market is anticipating a longer period of elevated interest rates, which was the key driver in higher bond yields over the quarter. UK equities rose marginally over the quarter, largely due to sterling weakness against a strong dollar and sharp recovery in crude oil prices. Brent Crude rose from the summer lows of $73 to just over $90 at the end of the quarter. Central Banks will be watching moves in the oil price closely, given the implications for inflation.

A number of domestically focussed areas of the market also recovered following poor performance year-to-date, primarily driven by improving consumer confidence and hopes that base interest rates have peaked.

Looking ahead, there are some positives on the horizon. While a recession looks to be almost inevitable, particularly in the UK, this should point towards the end of the rising interest rate cycle. Given markets are forward looking, they are now beginning to look beyond this point and any signs that prolonged inflation is falling back should be received positively by interest rate sensitive investments such as bonds, infrastructure and property – as much of the bad news looks to be priced in.