Market news today - growth is back in focus

HAVE we just hit the Wile E Coyote moment? The point when the cartoon character finally realises there’s nothing below his frantically spinning legs - and he drops. After a year of relentlessly rising interest rates, the cracks are at last showing in the data. Have central banks gone too far?

Where next for the consumer?

One of the remarkable features of the year-long monetary tightening cycle has been the resilience of the consumer. Buoyant job creation has kept unemployment low and savings from the pandemic’s enforced do-nothing period have played their part. Fixed rate mortgages have maintained the illusion for a while.

But last Friday, on either side of the Atlantic, there was the unmistakeable sound of the penny dropping. The University of Michigan’s widely watched consumer sentiment survey showed an unexpectedly dramatic fall from 63.5 to 57.7. Economists had expected 63.0.

Over here, first quarter GDP data eked out a 0.1% gain, but the number for March was a worse than expected 0.3% decline, with consumer-facing parts of the economy the main contributor to the slowdown. Recession has been postponed but we are not out of the woods yet.

The relationship between growth and inflation remains tricky. Over there, longer-term expectations for prices are rising despite the short-term concerns. Here, inflation remains in the double digits. Older readers will remember the stagflation of the 1970s. It was a vicious cocktail then and no-one is hoping for a re-run.

How will this play out in the markets?

The first-round impact of this growth-inflation dance is likely to be felt in the currency market. The pound is standing at a multi-month high of $1.26, with last year’s political turmoil and near parity with the dollar a fading memory. It’s the different trajectories of interest rates on either side of the pond that’s driving sterling’s strength. The Fed looks to be done for this cycle; the Bank of England has more work to do.

In terms of stock market sectors and styles, too, interest rates are key. The prospect of lower interest rates in the US has rekindled investors’ love affair with growth stocks whose profits look more valuable in today’s terms when interest rates are falling. Performance year to date has been dominated by just three sectors - communication services, information technology and consumer discretionary (which in America largely means Amazon and Tesla).

Consumer staples, which normally do well in a slow down are faring OK, but less well than you might expect. In large part that’s because, for the first time in years, there’s a genuine alternative for investors in the form of government bonds. With the three-month yield safely over 5%, many are questioning why they should bother with stock market risk. The least risky part of the market continues to look like the relentlessly high-growth, high-margin growth stocks that have led the charge for so long. For now, the lack of economic growth means the companies that can reliably deliver earnings growth command a premium.

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