Mercer market review 

Markets can move rapidly and conditions can change based on macro- and micro-economic news and data. At times, it can be difficult to keep up and to determine the important information from the noise.

Our global investments analysts and researchers, and market and asset class specialists, are constantly monitoring markets to identify the most important developments potential opportunities. 

Our monthly and quarterly insights reports provide a summary of what we believe to be the most significant news points and market movements and attempt to explain them, aiming to keep you on track and informed while still allowing you to keep a focus on the long term.

In August, equities weakened after a strong run over the past few months.  The US outperformed most major developed and emerging market countries, while growth generally outperformed value. Fixed income performance was flat to negative.

Negative equity performance appears to have been driven by an absence of positive news and markets being technically overbought after a few months of strong gains. Comments by Federal Reserve Chairman Powell stating that inflation remains uncomfortably high and the Fed is prepared to raise rates further if needed also contributed to the negative sentiment. Some negative headlines such as the Fitch downgrade of US government debt and Moody’s downgrading US regional banks did not lead to major market reactions. Telecommunications and energy were the only sectors with positive returns during the month. 

Forward-looking composite purchasing manager indices (PMI) continued to fall. In the US, the composite PMI fell to a six-month low.  Overseas, composite PMIs also declined for the UK, Eurozone and Australia.  Japan was one of the only regions to see an increase in their PMI. Consumer confidence continues to weaken with growing signs of consumer distress, such as rising credit card and auto-loan delinquencies. Labour markets appear to be cooling off, but generally remain strong. Overall, this paints a picture of a slowing economy with some regions weaker than others, particularly China, UK, and Eurozone.

Headline inflation ticked up slightly in the US and dropped sharply in the UK and Eurozone, largely driven by base effects. Inflation remained unchanged in Japan and turned negative in China. Core inflation generally continued to soften for most regions. At the annual summit in Jackson Hole, central bankers expressed cautious optimism, while acknowledging that inflation remains elevated. Federal Reserve Chairman Powell suggested that the Fed intends to hold rates steady, but it is prepared to raise rates further if necessary. The Bank of England raised the bank rate for the 14th consecutive month to 5.25%, while China’s Central Bank introduced some easing measures. 

In terms of geopolitics, talks over alternative export routes for Ukrainian grain made progress amid the ongoing conflict. At the BRICS Summit, invitations were extended to six nations to join the block. 

US dollar strengthened against all major currencies, most notably against the Australian dollar, South African rand and Japanese yen. Oil prices rose during the month and reached their highest levels for 2023. Wheat prices dropped sharply over the month as Russia increased its shipments after a better-than-expected harvest which offset the negative impact of renewed uncertainty over Ukrainian supplies. Global REITs declined during the month, modestly underperforming broader equity markets.

Global markets moved higher during the quarter as slowing inflation, the pause in the Federal Reserve’s hiking cycle, an agreement on the debt ceiling and enthusiasm over artificial intelligence supported investor optimism.  Volatility remained relatively subdued throughout the quarter, despite issues in the banking sector and difficult negotiations over the debt ceiling.

Treasury yields generally rose during the quarter. Longer-term yields ended the quarter near where they started the year.  The 10-year Treasury yield rose 33 bps from 3.5% to 3.8% during Q2.

The Bloomberg Aggregate Bond Index fell 0.8% in Q2, while the MSCI ACWI index rose 6.2%. During the second quarter, a traditional 60/40 portfolio rose 3.4%. Through the first half of 2023, a 60/40 portfolio has gained 9.2%.