Shares shine
Global share markets performed particularly well, with many major markets hitting record highs in March. The primary driver was the growing belief that inflation globally will continue to decline, and that the US economy will not slip into recession, but rather experience a ‘soft landing.’ In this scenario inflation will gradually fall, economic growth will remain positive (albeit slow), and unemployment will not rise significantly.
The US economy has proved to be surprisingly resilient to previous interest rate rises and remains among the strongest global economies. One of the reasons the US share market performed so well is that the so-called “magnificent 7”, which refers to US companies Nividia, Meta, Amazon, Microsoft, Alphabet, Apple, and Tesla – all delivered stellar results. These companies are ‘mega-cap’ stocks, among the largest companies in the world and valued at over $200 billion each. Because they are so large, when they do well the whole US share market is positively affected.
At the same time, while we can’t ignore the contribution of the ‘magnificent 7’ to share market performance, it’s the growing belief that the US economy will experience a soft landing that has most positively affected investor confidence.
Bonds were weaker
Bonds, on the other hand, were weaker over the quarter. Yields (the interest rate on bonds) increased, meaning bond prices fell. Bond yields fluctuate in line with investor expectations of future interest rates, and weaker performance in the March quarter reflects a shift in investor sentiment from the December quarter. Investors still believe central banks are likely to cut rates this year, but now believe they will not cut as soon or by as much as previously thought. At the beginning of the year, markets were pricing in (expecting) six rate cuts in the US in 2024, but it now seems that closer to three is more likely.
Australia’s story less positive
In Australia conditions are less positive. Our economy has slowed, and households are spending less as they struggle to cope with the triple whammy of higher interest rates, higher inflation, and rising taxes. Per-capita economic growth (growth per person) fell by 1% for the year to December 2023.
In better news, unemployment is still very low, but it would not be unexpected for slower growth to translate into higher unemployment over time – a risk the Reserve Bank of Australia (RBA) is monitoring closely.
Even though growth is weak, and inflation has been coming down, it’s still higher than the RBA’s target of 2-3%. It’s falling globally, so the prices of the goods we are importing are not rising as quickly, and this is positive for inflation. However domestic inflation is still a concern, in particular the rising cost of insurance, rent and utilities.
At the May meeting of the RBA it noted that “inflation is falling more slowly than previously expected”, and that they are “vigilant to upside risk”, or in other words, there is still a risk that inflation could rise again, and they could raise rates later in the year. Although Governor Bullock said she hopes she doesn’t have to – she’s not ruling anything in or out. A lot will depend on the economic performance data as it comes in.
