Much of the support for equities over the year has been driven by the equity market’s belief that the ‘terminal rate’ for this cycle of interest rates has been reached, and that the central banks would start cutting rates as soon as the end of this year. Contributing to this narrative was data showing inflation continuing to decline and a better than expected earnings season.

However, as the end of the quarter approached, stocks came off their highs and bond yields continued to rise as both the Federal Reserve in the US and the RBA emphasized that rates would remain higher for longer. The message is now coming in loud and clear that the central banks are not planning on a rapid policy pivot as many were expecting.

The Australian stock market is up 13.5 per cent for the previous 12 months, but much of that performance came from the last quarter of last year and the first quarter of this year. In the September quarter the ASX 200 Index is down by nearly 1 per cent. The IT sector is down by nearly 6 per cent for the quarter as the expectation of higher rates affects the growth stocks.

Developed Markets are up 17 per cent for the 12 months, driven by the large US technology stocks. But as the “higher for longer” narrative takes hold, these technology stocks have borne the brunt of selling, with the S&P 500 Information Technology Index down by more than 10 per cent from its July high.

For bond investors the pain is likely to continue, as traders are expecting further yield increases as the “higher for longer” message seeps in. Complicating the global fight against inflation is the unwelcome surge in oil prices and the fact that economies remain resilient.

Against the backdrop of continued rate increases, the bond market continues to signal that the US will end up in recession, along with the Eurozone, which will also markedly slow Australia’s economic activity. China’s economic slowdown after the post-pandemic rebound is also contributing to the gloom about next year’s prospects.

However, as we have seen throughout the year economic predictions have very little bearing on what markets will do over the next quarter or the next year.

Click here to review our Investment Committee Report – Quarter 3, 2023.

Source: Dr Steve Garth

Principia investment Consultants and member of Horizon Wealth’s Investment Committee