Touchbutton 84 – Petrichor and the Pivot

Phew, what a summer it has been so far! For most of us in the UK, the forecast of hot, sunny and dry weather has been on ‘rinse, repeat’, with only political quarrelling and the plight of the economy putting a dampener on things. Gardens and the parks around our London office bear the scars of weeks of no rainfall and record-breaking temperatures – nearby Green Park is certainly a misnomer and the dense, orange, leaf mat has given the landscape a very surreal autumnal feel.

But after weeks of stifling, thirst-quenching and sleep-depriving conditions we now have some light relief. The sweet, earthy scent produced when rain falls on sun-baked soil – petrichor – has finally arrived. Soon it should be followed by things coming back to life again.

“Investors will be aware that stock and bond markets had their own severe roasting in the first half of this year.”

Investors will be aware that stock and bond markets had their own severe roasting in the first half of this year. But they, too, have experienced a relief-signalling, ‘petrichor’ moment in recent weeks: the expectation that central banks, most notably the US Federal Reserve (‘the Fed’), could be limbering up to ‘pivot’ – changing tack and setting a less aggressive and slower course on monetary policy than expected at the start of the year. This potential pivot is based on weaker economic activity, but also some unexpected softening of US inflation data in recent weeks.

“Staying invested… has therefore allowed investors to regain much of the ground given up in the first half of the year.”

Seeing some light at the end of this inflationary tunnel, as well as some suggestion that recessionary conditions could be relatively short-lived, has powered a strong market rally over the summer months, particularly in somewhat oversold ‘growth’ sectors. Staying invested, as we have advocated, has therefore allowed investors to regain much of the ground given up in the first half of the year.

“Our use of genuinely uncorrelated, liquid, alternative investment funds… continues to provide an important hedge in the more defensive corners of portfolio construction.”

The changing backdrop still instructs us to maintain balance in equity markets – a focus on quality businesses with pricing power, strong balance sheets and good cash flow in this climate still feels right rather than chasing elusive or expensive ‘growth’ at one market extreme or permanently deep ‘value’ at the other. We are also mindful of the continued risks within fixed interest markets as inflation, economic activity, corporate profitability and monetary policy jostle for position. Our use of genuinely uncorrelated, liquid, alternative investment funds therefore continues to provide an important hedge in the more defensive corners of portfolio construction.

The jury is still out on the ultimate trajectory for inflation and economic growth, and what central bankers’ tactics will be, so care is still required. However, the sniff of petrichor and a Fed pivot should signify less intense heat and fresher conditions all round, allowing everyone to sleep a little more comfortably.

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