Bouncing Back – How Markets Weather Rate Rises?
When things are cheap then markets can climb no matter what and that seems to be happening.
Stock markets have been showing impressive resilience, despite predictable interest rate hikes in Europe and the US. Some even liken them to ‘Teflon’, a non-stick material, implying that no amount of financial turbulence seems to affect their upward momentum. Imagine a runner on a treadmill, unfazed by steep inclines – that’s our current market.
In the midst of these rate rises, there’s been a hint of tightening from Japan’s central bank. This change caused a small increase in bond yields. However, it’s a common event for seasoned UK investors. Still, it’s worth keeping an eye on Japan’s currency – a sudden surge could cause a few ripples in global markets.
China also made headlines with a rise in its markets, thanks to promising policy action. Though the specifics weren’t provided, analysts believe it’s not a cause for concern. China isn’t expected to inject massive support like in past crises, which means its markets might enjoy a better and steadier climb.
Speaking of rates, the US Federal Reserve and the European Central Bank have made history. Both raised their benchmark rates to their highest levels in decades. Despite some hints of inflation pressure, they haven’t confirmed if more hikes are on the horizon.
I expect that in the UK, the Bank of England might also join the hike bandwagon. Brexit and infrastructure issues put pressure on the UK economy, pushing it more towards inflation rather than growth. I may have been heard speculating that UK rates could rise incrementally a bit more before falling again next year.
The central bankers’ symposium at Jackson Hole, Wyoming, is the next place where central banks get to understand how their decisions affect each other. It can offer valuable insights into future policy directions.
Company earnings
US companies have reported some disappointing figures, with projections showing a drop in earnings. The same applies to European firms. This usually means falling or flat prices but despite this, US and European stock markets have been rising – a point of contention between optimists and pessimists.
A handful of tech companies have largely driven the US stock market’s growth this year. This fuels concerns about overvaluation, but it’s not all doom and gloom. Non-tech companies have lower earnings expectations and subdued valuations. This could make them the dark horses of the stock market rally, broadening its base and adding some stability.
In summary
We’re seeing a fascinating dynamic between rising interest rates, monetary policies, and stock market resilience. Markets seem to have found a way to keep running upwards, no matter the incline.
That tends to mean that as I again speculated, things had hit rock bottom last November and value will be taken no matter the backdrop.
Long may it continue to repay us some of what we are owed.