This week’s update comes from Richard Allen, who is in our discretionary management team in Peterborough.
In Aesop’s fable the Spendthrift and the Swallow, a tale is told of a foolish young man who squanders his fortune trying to live up to and then beyond his reputation. Having nothing left but his winter coat upon his back, he heads out one fine day and sees an unusually early swallow fly by. Taking this as a sign that summer has come early, he decides to sell his winter coat and use the monies to return to his spendthrift ways. A few days pass and the cold weather returns bringing about a harsh frost which kills the unfortunate swallow. Upon seeing the lifeless body of the bird and standing in his tunic, the spendthrift cries “Miserable bird, thanks to you I am perishing of the cold myself”. The moral of the fable reminds readers that “One Swallow does not make a summer” and warns them that they should not read too much into small signs. The tale also offers a valuable lesson which is as relevant today on the financial dangers of living beyond ones means.
Over the last week, financial markets have continued to stabilise as fears over the banking sector have abated. In the US, First Citizens Bank has agreed to the purchase of Silicon Valley Bank’s deposit and loan portfolios and in Europe UBS has announced the return of former chief executive Sergio Ermotti to oversee the integration of Credit Suisse. There is also a growing feeling that the Federal Reserve (Fed) will now no longer have to continue raising interest rates to defeat inflation. On Friday the Core Personal Consumption Expenditures Index, which is one of the Fed’s favoured inflation indexes, showed a below-expectation increase in prices.
All of these developments have been positively received by investors. Indeed, when we look at the first quarter numbers from US equity markets you could draw the conclusion that markets have been able to sidestep many of the big issues and all is “hunky-dory”. For the first quarter, the Nasdaq has gone “gangbusters” closing up 17%, the S&P 500 by 7.3% and the Dow Jones by 2.2%1. European markets have also advanced over the quarter but in the low single digits. Moving forward the question for investors and perhaps those in the US in particular, where valuations remain expensive, is would it be sensible to “temper their views”?.
With all the focus on the banking sector it has largely been overlooked that several Fed officials continue to make hawkish noises. The heads of both the Boston and Richmond Federal Reserve Banks indicated last week that interest rates would have to stay higher to defeat inflation. US employment markets continue to remain tight, and inflationary wage increases continue to feed through. The news this morning that Opec members, led by Saudi Arabia, have cut existing oil production could also mean the inflationary pressures linger. Despite this though, investors continue to expect that US interest rates will be cut as we move into the autumn2. But what if these expectations prove overly optimistic and that rates cuts are pushed back towards the year end or even into 2024? This could spell trouble for markets. Ultimately you have to also wonder if the problems we have seen so far which have flared up with the rise in interest rates, are like an iceberg hiding trouble further down below.
Have a good week and Easter holidays. Next week's update will be published on Tuesday 11th April.
1 FE Analytics, US Indices in US Dollar Total Return