There’s a mixed scorecard for the markets at the halfway point of the year, but the world’s most popular cryptocurrency is powering higher following renewed interest by some of the world’s largest investment funds.
After threatening to wipe out all its gains for the year at one point last Monday, the New Zealand sharemarket has closed out the first half of the year with a small gain of 2.8 percent after rallying strongly mid-week on better than expected confidence data.
The NZX50 ended the month at 11,916 after trading as low as 11,611 earlier in the week and threatening to fall below its key support level at 11,600 but rebounded after two surveys showed improving confidence amongst both businesses and consumers.
But for local sharemarket investors it’s been a lacklustre six months with the NZ market largely trading sideways and struggling to make any significant headway, either up or down.
At 12,100 the NZX50 has tended to look overbought, at 11,600 oversold, resulting in the index remaining stuck within this narrow trading range for most of the year.
However, compared to the performance of US markets, both the NZX50 and Australia’s ASX200 have been way off the pace.
In particular, the tech-heavy Nasdaq, which has benefited from a huge resurgence in tech stocks as a result of the explosive growth in AI, recorded its best first half performance since 1983 and its best six month performance since 1999 prior to the Dot.com crash.
A small group of high profile stocks which are now being referred to the ‘Magnificent Seven’ that include Apple, Amazon, Tesla, Microsoft, Alphabet (Google), Meta (Facebook) and chipmaker Nvidia have all gained between 35 percent and 195 percent year-to-date, while Apple’s market valuation surpassed the US$3 trillion mark as its shares hit a fresh record high of US$191.42.
However, while the broader S&P500 is up 16 percent year to date, if all the stocks in the benchmark US index were weighted equally, it would show a much more modest gain of just 5 percent.
Of course it hasn’t all been plain sailing. In March the collapse of Silicon Valley Bank and Signature Bank and the subsequent downfall of First Republic Bank threatened to derail markets as investors began to worry about a potential repeat of the Global Financial Crisis. But quick action by the Federal Reserve to ensure depositors didn’t lose out averted a crisis that had the potential to spillover into the entire financial sector.
Markets also largely brushed off the recent political brinksmanship involving America’s US$31.5 trillion debt ceiling which has been pushed out for a further two years.
But perhaps the biggest surprise of the year so far has been the dramatic resurgence of Bitcoin.
Despite facing multiple headwinds, including the failure of crypto exchange FTX late last year and numerous government regulatory investigations in the US, with the potential to shut down several major trading platforms, the world’s most popular cryptocurrency continues to power higher following renewed interest in recent months by some of the world’s largest investment funds.
Outside the US, Japan’s Nikkei 225 index has been the world’s second best performing equity market as investors, including legendary US investor Warren Buffet, have piled back into a market that has been decidedly out of favour for more than two decades. The Bank of Japan’s surprise decision to maintain its ultra-low interest rate policy has resulted in the Japanese yen trading at a 20 year low against the US dollar making it particularly attractive for foreign investors.
On the flip side, China’s economy continues to struggle after initially surging once Covid restrictions were eased. Its stockmarket, as measured by the CSI200 index, remains one of the few major equity markets to be in negative territory year-to-date, while shares in former market stars such as Alibaba are down more than 8 percent so far this year.
The oil price remains subdued and has been amongst the worst performing sectors so far this year, though this has also provided a much needed bonus for the global economy by not adding to existing inflationary headwinds.
Year-to-date performances across various markets and asset classes at the half way point in the year reveal a mixed picture:
Bitcoin – UP 85%
Nasdaq (US) – UP 33%
Nikkei225 (Japan) – UP 29%
S&P500 (US) – UP 16%
Stoxx600 (Europe) – UP 9%
Gold – UP 7%
ASX200 – UP 3.7%
NZX50 – UP 2.8%
NZ/US$ – DOWN 3.4%
Oil – DOWN 13%
Maintaining low unemployment key to second half of year
The big question investors now face is, what does the second half of the year look like?
The bears will argue that more rate hikes are still to come as ‘core’ inflation continues to remain elevated and the full impact of higher rates are still to be felt which will lead to economic growth slumping even further thereby pushing up unemployment. The bulls on the other hand will say that the worst is over, consumers continue to demonstrate their resilience and AI is about to reset the agenda and usher in a wave of productivity gains much like the dawn of the internet in the late 90s. Oh, and not forgetting there’s also the likelihood of rate cuts next year as well.
Maintaining a low unemployment rate though remains the single most important variable on which everything is predicated.
Up until now, layoffs and redundancies have largely been restricted to banks, the tech sector and other professional service providers who have been ‘trimming their sails’ in anticipation of a slowdown in economic activity, while the much larger services sectors, which includes hospitality and tourism, continues to suffer from acute labour shortages.
“If you believe that the Fed will be successful in slowing down the economy, it’s hard to justify where the equity market is at present. Right now something feels a bit out of whack.”
– Greg Davis, Vanguard
As long as consumers can see light at the end of the tunnel and business confidence begins to slowly rebound, which is starting to become evident (see below), then markets could continue to push higher. In fact, in an apparent switch, economic confidence globally now seems so strong that stocks can continue to rally even as investors reluctantly conclude that this also means that lower interest rates may invariably be further delayed.
However, on the flipside, markets could be getting ahead of themselves. If the first half of the year turns out to be a false dawn, inflation remains stubbornly high, central banks are forced to continue hiking rates beyond what they have already outlined, consumers begin to crack, and unemployment starts to rise then all bets will be off and stocks will fall sharply to reflect this mispricing.
In the US in particular, it’s also the lack of breadth in the rally that has left many analysts and investors sceptical that the current gains can continue, particularly given concerns that the Federal Reserve’s ongoing efforts to bring down inflation will ultimately push the economy into recession.
“If you believe that the Fed will be successful in slowing down the economy, it’s hard to justify where the equity market is at present” Greg Davis, managing director and chief investment officer at Vanguard, tells the Financial Times. “Right now something feels a bit out of whack,” he adds.
While markets remain optimistic and continue to grind higher betting on better times ahead , ultimately though, it will be central banks who have the final say on which side is right.
Confidence rebounds as surveys show consumers and businesses expect things to improve
Huge queues outside service stations that stretched far and wide across Auckland on Friday ahead of the reinstatement of the 25c fuel tax suggests that saving a few dollars on a tank of gas still matters to many people feeling the pinch from the ongoing rise in the cost of living.
But two surveys out last week provided some welcome good news, albeit in small doses, that both businesses and consumers are beginning to become more positive about their outlook, though off a very low base.
ANZ’s latest monthly Business Outlook Survey showed a marked improvement in overall business sentiment, while cost and inflation expectations have dropped.
“Encouragingly, a general downtrend continues to be evident in firms’ expected costs in three months’ time relative to today.”
– Sharon Zollner, ANZ
ANZ chief economist Sharon Zollner said business confidence leapt 13 points in June, the highest read since November 2021, while expected own activity jumped 8 points; “hardly strong, but the first time in 14 months that it’s been in the black.”
“June saw activity indicators lift in a reasonably broad-based fashion. While the levels of many are still subdued, firms appear to be cautiously optimistic that the worst may be over.”
Zollner said headline inflation and pricing indicators continue to slowly ease. Inflation expectations have the steepest downward trend, “but are still extremely elevated”.
The fall in the net proportion of firms expecting higher costs was “particularly marked” this month, she said.
“Encouragingly, a general downtrend continues to be evident in firms’ expected costs in three months’ time relative to today. The data imply that on average, firms continue to expect margin compression, given costs are expected to lift more than prices.”
Zollner said wage growth was a key driver of the persistence of non-tradable inflation. She said in the latest survey reported past wage settlements ticked slightly lower and expectations of wage settlements for the next 12 months “continued to trend lower in a broad-based fashion”.
“While job security is still excellent on the whole and wage growth remains historically strong, the ongoing cost of living increases continue to bite meaning the overall level of confidence continues to be very subdued.”
– Sharon Zollner
Additionally, the latest ANZ Roy Morgan Consumer Confidence Survey showed that while consumer confidence has improved somewhat, it remains very subdued.
Consumer confidence rose six points to 85.5 in June, the highest it has been since January last year.
However as Zollner noted, “it’s not all rosy in consumer land”.
“While job security is still excellent on the whole and wage growth remains historically strong, the ongoing cost of living increases continue to bite meaning the overall level of confidence continues to be very subdued,” she said.
The survey also threw up some apparent contradictions.
Consumers perceptions of their personal financial situation dropped 4 points, so that more people felt they were currently worse off, and yet more people were expecting to be better off this time next year.
“Those with mortgages are generally more pessimistic, with the notable exception of the question about their personal financial situation in a year’s time,” Zollner said.
“This suggests that people are expecting lower interest rates within that time frame.”
But she cautioned: “For our part, we’re not so sure.”