August 2022 Review

Augusts annual symposium at Jackson Hole was the catalyst for the mid-month reversal in markets.

By portfolio advisor Paul Sedgwick

Dear Partner

The month of August ended in a very different manner from the way it had started. The rally began in July, as equity sentiment became extremely bearish. Money was encouraged back into equities as hopes that inflation in the US had peaked, the Fed could become more dovish, and inflation could be tamed without inducing an economic recession. Economic data continued to point to a weakening economy, but no worse than had been forecast. The Citi economic surprise index rebounded, and although this earnings season brought some shocks, overall earnings exceeded expectations year over year.

After a recovery in stocks, particularly US ones that had taken the brunt of the selloff, the S&P recovered almost 15% from its lows. It was clear indexes had once again gone ahead of themselves. The recovery had started to run out of steam towards the middle of August. However, the real catalyst for a correction that has resulted in the S&P 500 falling over 3% in the month, around an 8% correction from the recent highs, was Jerome Powell's speech at the annual symposium of leading economists at Jackson Hole, Wyoming. The Federal Reserve Chairman pulled no punches as he confirmed his view the labour market remained too strong. Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. The probability of a 75 basis point interest rate hike in September rose from around 50% to close to 80%.

Shorter dated US treasury yields had been rising all month at a faster rate than at the longer end, and the trend continued as bond markets appear to be pricing in a greater chance of a US economic recession. A weakening dollar in July and the first part of August helped support the recovery; however, the dollar had recovered by the end of the month to levels earlier in the year.

Total Return Balanced and Total Return Equity Portfolio Review

Both portfolios, reflecting the weakness in broader indexes, gave back some ground by the end of the month.

Estee Lauder's earnings reported organic sales growth was just 8% in Q4 FY22. COVID restrictions in China and other one-offs are to blame, and these problems are temporary and local in nature. Revenue is expected to be just 3- 5% in the full year 2023 due to a currency impact of 4% and further impacts from Russia, Ukraine, and a major licence termination. Overall the market had an initial positive reaction to the report. Estee Lauder has strong global franchises built on leading brands, high-quality products, scale, innovation and marketing capabilities. With the stock down around 25% this year, we saw it as an opportunity and will look to add into any further weakness. PayPal continued its recovery post its results, and British American Tobacco continues to attract investors. Smith and Nephew remains weak, but we still maintain the company has a strong position in medical devices and wound care, and the new CEO has lowered market expectations.

Market Overview

Looking ahead, there remains a great deal of uncertainty; the UK economy feels in a bad place, as does Europe. Despite the hawkish tone from Jerome Powell, overall, the US economy may not be in a great place but maybe not as bad as Europe, partly due to its lack of reliance on Russian oil and gas. Inflation rates appear to be slowing, and consumer confidence has picked up in the past few months. US consumer confidence and the price of oil appear closely linked. We have a new prime minister in Liz Truss, who seems keen to help stimulate growth by reining in some of Rishi Sunak's tax policies, but time will tell. 

We hope that a combination of continued Bank of England rate rises and measures to help support the economy will assist the pound, particularly against the US dollar.

On balance, the Fed has made it clear they want inflation back under control and Powell's comments a few years ago that the Fed was prepared to let inflation "run hot" for a while no longer remains the case. However, the Fed always appears to have one eye on asset prices and the economy. Therefore, it is possible if asset prices remain under pressure, then should inflation rates continue to show signs of easing back, the Fed could turn more dovish towards the year-end.

Yours sincerely

Cube Capital