August 2022

Economic and Market Commentary


Global share markets underwent an about-face throughout the course of August, beginning the month well, but giving back all the gains and then some. The US S&P 500 traded most of the month in the green, but was unable to remain above key resistance levels. More broadly, US shares ultimately closed at their lows after US Federal Reserve (the Fed) chief Jerome Powell laid to rest any hopes of a dovish pivot in monetary policy at the Jackson Hole Economic Symposium. Prior to Jackson Hole, markets were positioning for the Fed to start cutting rates in the second half of 2023.
Domestic shares fared better than their global peers thanks to a strong August reporting season, where ASX-listed companies revealed their FY22 earnings results. While profitability came under more pressure than in earlier phases of the pandemic recovery, overall demand had held up and margin compression was not yet as widespread as some analysts had feared. Dividends usually met or exceeded expectations and the major banks had mostly avoided a deterioration in asset quality. Listed property had a much tougher time as risk free rates again began to climb.
Elsewhere, the US dollar remained strong against all major crosses as investor attraction to ‘safe haven’ currencies continued to prevail. The strong greenback was accompanied by falling energy and commodity prices, which weighed on the Australian dollar. Rising yields made non-income-generating assets, such as gold, less attractive and ensured that bond markets had to endure further large falls in what are traditionally less volatile defensive investments.

Asset class returns

Source: Evergreen Consultants, Financial Express, AUD total returns as at 31 August 2022.

Market Commentary

The relief rally that commenced in mid-June in equities and bonds came to an abrupt halt at the end of August. Over a two-month period, sharemarket technical indicators went from flashing heavily oversold to heavily overbought, as investors placed bets that inflation had peaked and central banks would ease off the pace of rate hikes. Markets reacted with widespread selling to the hawkish tones of Jerome Powell’s speech at Jackson Hole. Powell and other US Fed members signalled that they are strongly committed to stamping out inflation and that one or two lower inflation reads will be insufficient to change the course of interest rates. Prior to Jackson Hole, markets were optimistically positioning for a cut to interest rates later in 2023 and, at worst, a shallow recession in the US.
In US dollar terms, the S&P 500 fell 4.1% inclusive of dividends, despite being more than 4.7% higher by mid-August. This is an astonishing turnaround as the market entered September, which is historically the worst month of the year for returns, with an average decrease of 1.03% since 1928. From a factor perspective, value outperformed growth again in August as bond yields rose. While developed market equities generally followed the US lower, emerging markets finished August higher as China announced a new stimulus and investors speculated that it had navigated the worst of its Covid-zero policy impacts.
Domestic equities also posted positive returns, but this was more in response to another solid earnings season, with rising dividends the order of the day. In fixed interest markets, higher sovereign bond yields punished returns, as investors were rattled by the events of Jackson Hole. Cash returns improved as short-term interest rates continued to increase.

Economic Commentary

On the domestic economic front, the Reserve Bank again hiked the official cash rate in August by 0.5% in a bid to quell domestic demand. Governor Lowe warned that further increases were on the horizon, but that inflation and labour market conditions would ultimately dictate the trajectory of interest rates, as opposed to some pre-set path. To date, the most immediate impact of tighter monetary policy has been on the housing market. National house prices have fallen 3.5% since peaking in April, according to CoreLogic data, with Sydney leading the way, down 7.4% since February, followed by Melbourne, which is down 4.6%. Mortgage lending has also slumped.
Among global economies, the US showed signs of improvement following its first half ‘technical recession’. Jobs data remained strong overall, but the steady increase in new claims for unemployment benefits is evidence that rising interest rates is impacting some sectors. The July CPI figures provided more hope that headline inflation has peaked and rising mortgage rates, which have more than doubled since early January, is clearly weighing on the homebuilding sector.
In Europe, constrained natural gas supplies from Russia added further pain to households and businesses, which are already rationing energy usage in a bid to increase stores for the winter. While Eurozone second-quarter GDP surprised on the upside, member states more heavily reliant on Russian energy, such as Germany, fared poorly. German producer prices increased by 37.2% in July, the biggest increase on record. Recession risks remain elevated, as shown by the weakness of the euro, which dropped to parity with the greenback. Finally, the impacts of drought are also taking hold in the US, Europe and China, where crop yields have sharply fallen. Farmers staged protests for more water access and called for a reversal of some climate policies that had limited the use of land for farming- related purposes.

Disclaimer: This economic and market update has been prepared by Evergreen Fund Managers Pty Ltd, trading as Evergreen Consultants, AFSL 486 275, ABN 75 602 703 202 and contains general advice only.

It is intended for Advisers use only and is not to be distributed to retail clients without the consent of Evergreen Consultants. Information contained within this update has been prepared as general advice only as it does not take into account any person’s investment objectives, financial situation or particular needs. The update is not intended to represent or be a substitute for specific financial, taxation or investment advice and should not be relied upon as such.

All assumptions and examples are based on current laws (as at June 2023) and the continuance of these laws and Evergreen Consultants’ interpretation of them. Evergreen Consultants does not undertake to notify its recipients of changes in the law or its interpretation. All examples are for illustration purposes only and may not apply to your circumstances.