August 2023
Market Commentary
(2 minute read)
Post-Covid markets in the context of the last two decades
The last three years have seen a dramatic change in the themes that have driven the global economy and as a result the drivers for financial markets. Leading into the global pandemic, policy makers had been driven by, almost obsessed with, the deflationary forces that resulted from the 2008 Financial Crisis and persisted with very loose monetary policy in the form of zero interest rates and quantitative easing (QE), essentially printing money. When the economic reality of the pandemic set in during 2020, central banks hit the accelerator even harder with more QE and governments increased spending dramatically in the form of furlough handouts to households and businesses. The reaction of financial markets was that bond yields remained extremely low, while equity returns were differentiated by strong returns in growth companies that benefitted from society staying at home during lockdown and poor returns from companies that relied on an open economy to conduct business.
As the global economy opened following the recovery from the pandemic, policy makers did not reverse the monetary and fiscal ‘covid adjustment’ leaving vast amounts of liquidity in the financial system. A combination of disrupted supply chains because of lockdown and the Russian invasion of Ukraine, put significant upward pressure on commodity prices, in particular food and energy costs. The consequence of this is that inflation has increased to levels not seen since the late 1970s. It is fair to say that the major central banks have been asleep at the wheel believing that higher inflation would be ‘transitory’. Realising that inflation could become entrenched the US Federal Reserve, for example, has increased interest rates from 0% to 5.25% over the last year, a rise not seen since the 1980s. As interest rates started to rise ‘risk assets’ came under pressure, although there has been a good recovery in the last nine months.
The themes that markets are currently dealing with is whether the major central banks have raised interest rates enough to reach their 2% inflation target and whether economies will achieve a soft landing and avoid recession. In the US it is looking increasingly likely that a hard recession will be averted, and that inflation will settle near, if not a bit above, the Fed’s target. It is unclear whether the same can be said about the UK. Uncertainties for markets and the economy remain and volatility will continue to be a feature. However, this often provides good investment opportunities.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
10th August 2023
