A tale of two halves for the markets so far this year

September marked the end of the third quarter of a year which is turning out to be one of two halves! To recap, stocks performed well in the first half as the twin anxieties of inflation and recession receded.

Technology stocks, which were aggressively sold off in 2022, led the rebound, receiving a further boost from the introduction of practical generative artificial intelligence (AI) tools, which suggested that potential profits from the technology sector could arrive sooner than had previously been estimated.

The third quarter has been very different, with stocks losing momentum against a background of changing economic dynamics in the global markets.

Oil price continues to rise as demand is revised up

After a period of moderation, the oil price spiked in June, and this has continued throughout September with the price of Brent crude oil topping $96 per barrel. OPEC leader Saudi Arabia, as well as Russia, agreed to production cuts to support higher prices, on fears of economic slowdowns. 

The supply-side restrictions were compounded with faltering demand for investing in fossil fuels, driven by the view that demand will be lower in the future. Meanwhile, the Energy Information Administration’s estimate for oil demand this year has been revised up. The forces of demand and supply conspiring for higher prices! 

Federal Reserve amends its interest rate expectations

These higher oil prices added to investors’ fears about persistent inflation in the US and Europe, and the S&P 500 recorded its largest one-day loss in six months (21 September) after the Federal Reserve increased its interest rate expectations in response to stronger economic activity.

The Fed’s so-called dot plot suggest another rate increase this year, followed by two rate cuts in 2024,  two fewer than the last update in June. 

The UK and European update on interest rates

Sticking to central banks, the Bank of England kept rates on hold, the first pause since December 2021.

This was a close call, however. five policymakers voted to keep rates on hold, with four advocating for a 0.25% increase. Meanwhile, the European Central Bank president Christine Lagarde gave a speech where she highlighted that while rates may have peaked, they will remain high for as long as it takes to get inflation down to the 2% target.

What followed was encouraging inflation data with eurozone inflation at lowest level in two years, with similar positive news from data across the pond. 

Consumer confidence index fall could signal recession in the US

Less positively in the US, the Conference Board’s gauge of consumer confidence fell again in September to 103.0 from 108.7 in August. This was driven by a steep decline in the ‘expectations’ sub-index to 73.7 from 83.3. The Conference Board said that a reading below 80.0 historically signals a recession within the next year.

Stock news

In terms of stocks, as you would expect, it has been a positive month for oil companies, such as BP and Shell. It also saw fitness brand heavyweights Lululemon and Peloton join forces, with a partnership in digital content and apparel.

Sticking to fitness brand heavyweights, Nike posted results which were well received by investors after a difficult period. It has made progress on its inventory glut, and despite the well-publicised macroeconomic challenges in China, this marked the second straight quarter of growth for the region.

Written and prepared for Crowe Financial Planning UK Limited by John Moore (Senior Investment Manager at RBC Brewin Dolphin)