Taking stock: Brite’s latest market update
Now that February has drawn to a close, we wanted to publish a market update exploring how inflation is declining across several countries in the Organization for Economic Cooperation and Development and how a challenging macroeconomic environment last year didn’t bode well for balanced portfolios.
Inflation across the US, Britain, and Europe declined in January compared with the previous year. While cyclical contributions to the headline inflation figures are abating, structural inflation increases in the US, such as in services, due to wage growth, are still persistent and tend to be stickier. Nonetheless, on a global basis, more than 2/3rd of the countries in the Organization for Economic Cooperation and Development are seeing a decline in headline inflation.
After a year of monetary tightening by most central banks worldwide to contain rising inflationary pressures, most central banks see an end in sight to the aggressive increases in their key interest rates. In the US, Federal Open Market Committee (FOMC) officials are seeing that the slowing inflation could support a peak in the key federal funds rate later this year, according to their recent minutes. That said, the FOMC reserves the right to raise interest rates further if the incoming economic data ends up being stronger than what they are forecasting.
The US government debt ceiling
Beyond inflation risks in 2023, the US government debt ceiling of US$31.4 trillion has been reached. Congress will eventually need to decide on raising, suspending, or eliminating the debt ceiling. Pending these debt negotiations, the US Treasury Secretary has initiated extraordinary measures to allow the government to borrow money and continue meeting its obligations. The non-partisan Congressional Budget Office expects the US Treasury to exhaust its ability to pay its bills sometime between July & August unless the current borrowing limit is either raised or suspended. Capital markets could have some additional volatility as we get closer to a final date.
With a challenging macroeconomic environment, last year was the worst year since 1937 for balanced portfolios. We saw significantly rising interest rates off historic lows, inflation, a strong USD, and weakening economic growth. This contributed to both equities and bonds positively correlating and provided negative returns. As the global macroeconomic situation evolves from such a challenging environment, well-balanced portfolios will be resilient and provide continued diversification.
Some final thoughts
When there are any concerning changes in global market data, it’s important to not to make rash decisions and consider the long-term outlook instead.
Please contact us if you have any questions about this market update or want to learn more about Brite Advisors and how we can maximise your pension and investment assets.