As Peter Baxter, chartered wealth manager at BRI Wealth Management explained, the worst first half for the US market since 1970 ended with a second quarter loss of -16.5 per cent for the S&P benchmark while the Nasdaq fell -22.4 per cent.
All eleven S&P sectors lost at least 5 per cent. The Euro Stoxx benchmark closed the quarter with a 12.0 per cent decline where Spain's Ibex (-4.1 per cent) held up the best of the major indices.
Relative outperformance from the UK indices was, unsurprisingly, driven by large cap stocks, the FTSE 100's decline limited to 5.9 per cent whereas mid and smaller cap indices lost 12.5 per cent and 11.5 per cent, respectively.
Continuing the trend established in late 2021, the MSCI UK value index, down 3.0 per cent, was ahead of growth, which registered a loss of 5.2 per cent.
Asia in general was similarly downbeat, with the Nikkei (-4.6 per cent) performing better than most but some way behind China, the MSCI China Index rising 2.3 per cent.
The Chinese government’s zero tolerance approach to Covid created supply chain issues by further delaying the manufacture and shipment of components needed to produce parts essential to the car and telecommunications sector.
Markets now expect interest rates to rise to 3.4 per cent, 3 per cent and 1.6 per cent in the US, UK and Europe, respectively, by next year.
This is now the worst first half of the year for developed market equities in over 50 years with all the key index benchmarks remaining firmly in a downtrend--Peter BaxterThat increase in expectations for the path of interest rates has contributed to the decline in equity valuations, along with concerns about the growth outlook.
Recession fears have risen, due to the squeeze on consumers from higher prices and higher borrowing costs as the central banks single-mindedly fight inflation above all else.
Cost of living woes
Baxter said his concern now was that inflation this time round was structural and could not be dampened through monetary policy alone, while the disruption to global supply chains could only be fixed by an increase in production.
However, by the time factory output reaches full capacity, it is conceivable that demand will have softened, should the consensus for most of the western world falling into recession next year prove correct.
He added: “As the cost of living crisis deepens for many around the world, now exacerbated by the growing threat of food shortages, it has been another difficult quarter for markets after what had already been a tough start to the year.
“This is now the worst first half of the year for developed market equities in over 50 years with all the key index benchmarks remaining firmly in a downtrend and with each attempted rally failing below the previous high.
“To make matters worse, government bonds remain under pressure, failing to provide the protection that investors traditionally expect from the asset class.”
UK inflation hit a new 40-year high of 9.4 per cent in June, up from 9.1 per cent in May, with surges in both food and energy prices to blame.
Matt Roche, associate investment director at Killik & Co said as consumers continued to be hit by inflationary pressure, due to rising food and energy costs rising, households were needing to dig into reserves and cut back on discretionary spending.
Roche added: “While much of the inflation had its roots in the reopening of the global economy following Covid, before being further fuelled by Russia’s invasion of Ukraine, the challenge for The Bank of England is to stop this inflation becoming embedded. As such, further interest rate rises are anticipated.
“Nevertheless, with inflation expected to reach 11 per cent by autumn, the purchasing power of savings in bank accounts is being rapidly eroded. In this environment, savers should look at investing as a means of inflation-proofing their money.
“While it is advisable to keep a cash buffer for emergencies and plan major outlays well in advance, surplus monies can be made to work harder. For example, a Stocks & Shares Isa can provide excellent tax efficient long-term returns.”
