Insights

ICM Monthly Outlook - July 2023

Contrary to consensus market opinion at the time, we stated in our monthly letter last December that we expected 2023 would be a good year for risk assets in general. Clearly, we are pleased with our call given how equity markets have performed in the first six months of the year. We remain constructive on risk assets such as equities and corporate bonds for the remainder of 2023 and especially as we go into 2024, given our view that the global liquidity cycle which has already started to turn. We expect this turn in global liquidity to be further boosted by the Federal Reserve Bank, by mid next year at the latest, however we maintain our view that in the short term to medium term it is better to adopt a more cautious view on US equities and risk assets in general.

Market Outlook - June 2023

Momentum is a measure of an object's motion and is determined by its mass and velocity. Let’s assume that the US economy is an ocean liner, and that the Federal Reserve’s monetary policy and level of interest rates is the force that is applied to slow or quicken the speed of this enormous ship. Even if the engines of the ocean liner are put into full reverse, its momentum, at first, will still push it forward. Of course, it will begin to slow, but it will take time for the entity to come to a complete standstill and even longer to move into reverse. The US economy works similarly with monetary policy and the level of interest rates as the engines that build or reduce momentum across the economy. This explains why the US economy, and certain components of that economy, such as the jobs market, can seem initially to defy the economic brakes applied by the Federal Reserve. Yet, it is inevitable that if the brakes are left applied, the economy will come to a complete standstill and, indeed, most likely will go into reverse if not lifted.

Market Outlook - May 2023

Human emotions run deep. Humans are naturally disposed to think subjectively, yet we must learn to think objectively. As investors and market participants, our emotions have a profound impact on our thoughts, behaviours and decision-making processes. Moreover, our emotions can lead to unconscious bias in our decision making as a direct result of our past experiences. At times of market extremes, these biases can have a more pronounced effect on the behaviour of the market and its participants and key decision-makers. We believe we are in such a period now.

Market Outlook - April 2023

A tipping point has been reached. Almost a year to the day after the Federal Reserve embarked on a new cycle of higher interest rates and tighter monetary policy, the most aggressive in US economic history, two US regional banks and a Swiss national champion bank have failed. While bond markets are pricing in one final interest hike by the Federal Reserve in May, we believe that the current cycle of interest rate hikes should already be at an end. Tightening cycles typically end with stresses starting to appear in the financial system. The Federal Reserve manages monetary policy in response to the economic indicators of inflation and unemployment, which tend to lag the business cycle, so when stresses appear, it is often a signal that they have gone far enough and, typically, too far already.

Monthly Outlook - March 2023

More information does not necessarily equal less uncertainty. February was a classic month where more new economic information only served to create more questions and drive further economic uncertainty. The key question facing markets right now is whether this rise in yields and sell-off in equities, especially growth orientated stocks, is just a one-off adjustment to reflect the fact that markets became too complacent and priced in too much inflation relief too quickly? Or does this reflect a more fundamental hawkish shift in Federal Reserve policy, where it is forced to embark on a renewed campaign of setting more restrictive financial conditions?

Monthly Outlook - February 2023

More often than not, when a central bank moves to loosen or tighten monetary policy, given that economics is an inexact science, they will typically end up over-tightening or over-loosening and making policy errors. It has been our belief for some time that the Federal Reserve would overtighten during the current cycle, leading to a sharp recession in the US and more significant collateral damage than was probably necessary to get inflation under control. Now we are less sure of a recession being a certainty, not because we think Chairman Powell and his team at the Federal Reserve have judged their tightening exercise to perfection, but more likely because they might have just got lucky.

Monthly Outlook - January 2023

As we enter 2023, there is probably no more significant determinant on markets and the economic path ahead than that of U.S. inflation and the Federal Reserve’s response to it with a view to bringing inflation back down to its longer-term target of 2%. We have a rather unusual situation where economic data is deteriorating, with U.S. manufacturing on the precipice of a recession, and yet we still have a seemingly very hawkish Federal Reserve. At this point in the business cycle, historically, the Federal Reserve would typically be about to start cutting interest rates if it had not already begun.

Monthly Outlook - December 2022

Just like winter storms, not all recessions are similar. Depending on their particular characteristics, the impact and after effects of these storms can be very different. Our regular readers will know that, since early summer, we have been predicting a significant growth slowdown and a recession to hit the US and other major global trading blocs, such as Europe and the UK, in late 2022 and the first half of 2023.

Monthly Outlook - November 2022

Most of us enjoy a nicely paced movie with a fresh storyline and a few twists and turns to keep us guessing. Observing the Federal Reserve combat inflation with its aggressive interest rate hikes and the resulting economic slowdown emerging over the last several months has been comparable to watching a below-average movie with a relatively predictable plotline and a sloth's pace.