“That led to a rally which kind of lasted until about July and then the fizz or the steam has come out of the AI rally.”
Meanwhile, inflation has proved stickier and “higher for longer” had become the mantra emanating from central banks.
“So that’s sort of what’s led the market down since mid-July, that long-term interest rates have risen about 1 per cent, which is quite significant.”
While US markets had pulled back New Zealand’s NZX50 has fared worse and has been in “Bear” territory for more than 1000 days (down more than 20 per cent since it’s last peak in January 2021).
How much longer then?
“I would think with interest rates at current levels, possibly squeezing a little bit higher in the coming six months, that it will start to slow down the US economy,” he said.
Longer fixed rates - of up to 30 years - made monetary policy slower to transmit in the US, he said.
But new mortgage applications in the US were now approaching record lows, which suggested a slowdown was starting to take hold.
“So, possibly in six months time, we could see a situation where the Fed is ... talking about the job being done,” he said.
“Of course, the market will anticipate that and it may well move months ahead of when the Fed actually comes out and says the job is done. But if we get to a scenario in the middle of next year when [US] inflation’s got a two in front of it, you’d expect the Fed to be comfortable that hikes are off the table.”
Unfortunately that didn’t necessarily mean New Zealand would be through the worst, he said.
Inflation had been a bit stickier here, although it was possible for our economy to turn faster.
“We’ve got a five in front of ours [inflation] and they have a three,” he said.
New Zealand’s annual CPI inflation is sitting at 5.6 per cent, compared with 3.7 per cent in the US.
What could delay things further?
There are clearly some geo-political risks that could cause problems for central banks, not least war in Eastern Europe and the Middle East, which affect the price of oil.
But Taylor is optimistic that the inflationary impact of any oil price spike would be offset by the dampening effect it had on demand.
“I think with oil price, you’d need to see a significant spike, back to the levels we got when the Ukraine war commenced...somewhere between US$120 a barrel and US$150 would have an impact on inflation,” he said.
“But at the same time, we know that if that happened, it would probably lead to a consumer-led recession. Yes, inflation would go up, but the economy would slow. So they’d probably be cutting rates anyway, in that type of scenario.”
Sadly markets were all too experienced at looking through trouble in the Middle East, he said.
“If you have a quick look on Wikipedia and you can see that there’s been some political unrest every year for the last 500 years,” he said.
Meanwhile, for now, investors would have to just play the waiting game, Taylor said.
“Maybe we pinch ourselves and try and think back to those big horrible crashes of decades ago and be glad that we haven’t got one of those.”
The Market Watch video show is produced in association with Pie Funds
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
