Acumen's financial market update for August 2023

It has been a short while since our last market update – mainly because there was little to report on as markets steadily recover over the world. As mentioned in our previous overview – the US is on a “no recession path” despite some of the traditional indicators suggesting that there are signs of weakness.

For instance, the government bond yield curve illustrates the different interest rates an investor can receive depending on how long they want to lock into a bond. Traditionally, if short term interest rates move higher than long term interest rates this has indicated a recession is likely.

The expectation is usually, the longer you lock away your money, the more you expect to receive in interest. The cause of this disparity is simply that the markets expect interest rates to fall over the next couple of years. 

This is usually a strong indicator of recession under normal circumstances – but the recent hikes in base rates by central banks are not normal circumstances. Nor was the rapid spike in inflation we have all felt over the last 18 months.

Inflation often gives companies the ability to increase the cost of their goods and services and widen their profit margin. High inflationary periods have actually been positive for many companies over the long-term. Especially if: 

1. Demand for their product/service is inelastic (petrol, gas, food). 
2. Demand for their product/service is due to a premium quality or competitive advantage (Branded Goods versus Own Brand Goods). 

As such, we are in the depths of the stock market’s earnings season as I write and 8 companies out of 10 are reporting stronger than expected earnings, larger than expected profit margins and growth across their businesses. 

Due to this, and a number of other factors – global economies remain strong, and recessions are seeming less and less likely.

Even in the UK – 12 months ago, the International Monetary Fund suggested that the UK had the lowest prospect of growth as an economy out of all the developed markets. They have had to redact that comment and change their stance following recent GDP numbers.  

As our very own Jon Landy recently said, “never second guess the markets”. Ultimately, over the short term, you cannot predict what will happen – but over the long term, the probability is high that companies will grow their profit margins, explore new areas to generate income and growth in their businesses. 

This is most important when you consider that earnings are the single most important factor to consider when looking at a company. Earnings pay the bills, allow for investment in new things and ultimately allow for dividends to shareholders.

With all of this in mind, we will keep reviewing the situation and ensuring you are updated with any relevant pieces of information – new or ongoing. The tide in the markets seems to be changing and the sun seems to be rising once again.

There are always things that can cause a slip, or some uncertainty – but remaining invested in multi-asset portfolios with long-term views gives investors the highest probability of growth.

If anything in this update prompts any questions – please feel free to contact us on 0151 520 4353 or email us at [email protected].