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Monthly Market Review - July 2023

Published on
August 8, 2023

Welcome to the Muslim Money Experts’ monthly market review, an analysis of global market performance. In this series of monthly blogs, we explore the implications of current economic data and changing market conditions that help you better understand the markets and support your investment decisions.

Markets continued their year to date rally in July, as more investors continued to move away from their defensive positioning to start the year. The MSCI World Islamic Index rose by 2.8% in July, while the Dow Jones Sukuk Index rose by 0.2%.

Over the course of the month, many asset managers and economists who at the beginning of the year had predicted a recession in the US walked back their predictions. This was due to the combination of continually strong payroll and earnings data and falling inflation.

On July 12th, the Consumer Price Index data for June showed that inflation in the US cooled dramatically, with all CPI indicators showing more decline compared with expectations and sharp declines compared with previous periods (source: Bloomberg). The markets rallied on the news throughout the remainder of the month, with the rally expanding globally as well.

The following week, UK data showed that overall inflation decreased compared to predictions. This was significant because the UK’s inflation had become elevated versus its developed market peers, and the cooling of inflation in the UK was seen as a final shoe to drop in the central banks’ fight against inflation globally.

Meanwhile, throughout the month, companies reported strong quarterly earnings, which was driven by strong consumer demand and cost containment.

Notably, over the last several quarters, it has become clear that during the pandemic when interest rates were at record lows, corporate finance managers took the opportunity to refinance their debts at lower long term fixed interest rates, which has resulted in interest costs of many large corporations actually decreasing since the pandemic even as interest rates have risen.

This prudent corporate finance management has allowed large corporations to maintain and increase payroll costs, which has supported employment levels during the rate hiking cycle, contrary to expectations.

As a result of these developments, the S&P 500 rose by 3.1% while the MSCI All-Country World Index excluding the US rose 3.7% (source: Bloomberg), despite central banks such as the Federal reserve hiking interest rates during the month. Many asset managers and economists now believed that interest rates were at or near their peak, and that central banks would likely succeed in reducing inflation and slowing down the economy without triggering a recession.

Meanwhile, in China, although the economic data continued to come in weak, the markets were lifted by the Chinese government announcing economic aid to support a rebound, including extending loan relief to the property market and easing home buying restrictions.

Heading into August, while much of the economic data is positive, a lot of this good news is already reflected in market prices which have been recovering since the beginning of the year. There is a good chance that markets will start to level off or pull back as investors lock in gains and become more sensitive to bad news.

Additionally, there are signs that markets may be overestimating the economic outlook in various sectors and regions. While artificial intelligence is undoubtedly a driver of long term value, it has not had a significant impact on current earnings. As another example, major European economies such as Germany and France are still struggling to achieve the growth that has been projected into the year to date performance of its markets. The possible onset of inflation in Japan is also a concern.

Given all of these factors, it may be a bit premature to declare a no landing outcome, where rising interest rates do not catch up to economic activity. Rather, it is likely that we have not seen the full impact of high interest rates yet, and a recession is only preventable for so long.

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