After a heavy sell off in June, stockmarkets recovered strongly in July and early August only to see this rally go into reverse towards the end of August and through September to the present date.
Perversely, the reason for the stockmarket falls of recent weeks is not due to pending recession fears (although those are very real) but, to the contrary, due to the strength of the US economy with strong demand and a tight labour market driving core inflation higher: this sets the scene for the US Federal Reserve to keep increasing interest rates until inflation is under control. It is higher interest rates and the knock on implications on the cost of borrowing, affecting both businesses and consumers, that are feared by institutional investors more than anything else.
We therefore see a continuation of the theme that has dominated stockmarkets since the turn of the year, which is the uncertainty as to how much higher interest rates might need to rise to ‘tame’ inflation and whether interest rates will have to go so high that they will cause a severe recession, or only high enough that they just cause a shallow technical recession.
Understandably, the UK press focusses on the problems facing the UK economy but the reality for UK investors is that the US economy is the one to watch: if the US economy continues to ‘run hot’, continuing to stoke inflation, we can expect to see the high levels of stockmarket volatility experienced over the year to date continue for the foreseeable future.
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