July witnessed several market moving events leading to high levels of volatility. Except for large cap US technology companies, which declined in value over the month, the volatility was generally to the positive side with both fixed income and equity markets delivering positive returns. Events over July included a surprise French election result, dramatic developments in the US presidential race which ultimately led to the withdrawal of President Biden in the race for the White House, and important policy pivots by the US Federal Reserve (Fed) and Reserve Bank of New Zealand (RBNZ).
With the US labour market clearly softening the risks of recession have risen. However, at this stage this appears to be a continued normalising of the US labour market and the economy remains on track for a soft landing. Market volatility, as we have experienced recently, can be expected at the time of Fed policy pivoting, given increased economic uncertainty. This has also come after a period of strong gains from global shares and some short-term weakness would not surprise. On a longer-term view, a reduction in interest rates will be positive for global sharemarkets.
Fixed income offers stability of income and the potential for capital gains from further declines in interest rates.