From their lows last year, global and US shares are up 17% and Australian shares are up 13% as investors have been buoyed by evidence of peaking inflation, anticipation that central banks are near the top, resilient growth and profits and enthusiasm for Artificial Intelligence (AI) following the launch of ChatGPT late last year pushing up related stocks. This has resulted in solid year to date returns. But is it sustainable?
The worry list for shares
Recent weeks have partly been dominated by the political soap opera around the US debt ceiling. A deal has now been reached suspending the ceiling out to January 2025 with caps on spending. There is still room for setbacks in terms of getting it passed by Congress ahead of Treasury’s 5 June deadline, but odds are it will pass providing a short-term boost for shares (which looks to have been factored in) allowing shares to focus on other things. However, right now there is a still a large worry list for shares:
First, share market gains from last year’s lows have so far been more narrowly based favouring defensive or growth sectors (like tech) relative to cyclicals and value than would be normal at this point. In fact, so far this year AI related stocks have accounted for all of the rise in the S&P 500 with the Dow Jones index actually flat year to date.
Second, leading economic indicators are continuing to point to a high risk of recession in the US and elsewhere. This can be seen in yield curves and the US leading economic index is also signalling recession.