In July, global equity markets showcased their resilience, buoyed by the economic fortitude despite towering interest rates and the onset of disinflation. Conversely, bonds faced challenges as central banks globally persisted with rate hikes, challenging the notion that 2023 might be the year bonds reclaim their glory.

Current market dynamics suggest that while the U.S. might be nearing its peak rate, Europe could witness more rate hikes.

Historic Optimism in Stocks Over Bonds

The sentiment favoring equities over bonds has reached its zenith in nearly a quarter-century. This optimism propelled the FTSE World TR index, which saw a 2.3% growth in July. Interestingly, Japan's Nikkei was the outlier, registering a minor dip. China's CSI 300, however, surged by almost 4% in July, pulling the index into the positive for the year, marking a 3.1% growth year-to-date.

Commodities, after a subdued first half, made a remarkable comeback in July. Leading the pack was WTI Crude, which soared by 15.8%, a direct consequence of production cuts spearheaded by OPEC+ and notably, Saudi Arabia. Precious metals also saw an uptick, with gold and silver rising by 2.4% and 8.7%, respectively.

Is the Equity Optimism Overstretched?

At Hawthorne, we've observed a potential overvaluation in the stock markets. The S&P500 is nearing its 2020 peak, despite the looming macro-economic and geopolitical uncertainties. The tech giants, often referred to as the Magnificent Seven - Nvidia, Meta, Tesla, Microsoft, Apple, Amazon, and Alphabet - are the driving force behind the U.S. stock market's upward trajectory. The Nasdaq's growth, although impressive, is narrowing its lead over the broader S&P500.

However, the manufacturing sector's anticipated revival seems to be on hold, as recent data indicates continued contraction. The U.S. was the sole bright spot, outperforming expectations. In contrast, European powerhouses like Germany and France reported disappointing figures. Additionally, there's a growing concern about the service sector's momentum slowing down, with several developed nations reporting figures that didn't meet market expectations.

The European Economic Landscape

Germany and France, in particular, are showing signs of economic strain. The continuous contraction in France's PMI is a testament to this trend.

U.S. Economy: Aiming for the Goldilocks Zone

Despite some setbacks, there's a growing sentiment that the U.S. Federal Reserve might successfully steer the economy towards a 'Goldilocks' state - not too hot, not too cold, but just right. The overarching hope is that the economy will remain resilient, even in the face of multiple rate hikes. Jerome Powell, the Fed Chair, expressed optimism, noting the early signs of disinflation without significant labor market repercussions.

Recent surveys, like the one from the National Association for Business Economics (NABE), indicate a positive outlook. A significant majority of forecasters now believe that a recession is unlikely in the upcoming year. This optimism is further bolstered by the Q2 GDP data, which exceeded expectations, and the Fed's preferred inflation measure, which is inching closer to its target.

At Hawthorne, we believe that while the global economic landscape is showing signs of recovery and resilience, it's crucial for investors to remain vigilant and diversified in their approach. The interplay of equities, bonds, and commodities will continue to shape the investment horizon, and a balanced perspective will be key to navigating these dynamic times.