Market insight August 2024
The first half of August saw sharp declines in global markets. Commentators were not short of possible explanations for the pullback, starting with recession fears in the US economy, disappointment at the absence of new stimulus in China, fears of a broader regional war in the Middle East and expensive valuations for US technology stocks. However, markets snapped back with their best weekly move since late 2022, with major growth and defensive asset indices ending the month higher.
The economic picture
Starting with the economic picture, a particular focus was the collapse of the yen carry trade. The cause of the volatility was the Bank of Japan’s surprise interest rate hike from 0.1% to 0.25%. Although a small jump, it had a powerful impact on the yen which rallied sharply against major currencies. For some time, some global investors have counted on a falling yen, borrowing at a low interest in the currency to buy assets offering a higher yield. With US interest rate expectations concurrently fading on a weak employment reading, an unwinding of this carry trade took place. This provoked a dramatic selling of Japanese equities, which at one point fell 20% before mounting a comeback.
Later in the month however there was then some better economic news for investors from the US Federal Reserve. Speaking at Jackson Hole, Jerome Powell sent a clear signal that the Fed stands ready to cut interest rates and this helped ease market fears that persistent high interest rates might cause a recession in the world’s largest economy. This news helped major markets close the month higher.
Inflation
In terms of inflation, the trends remain unchanged in most countries: a slow deceleration in headline inflation and improved inflation expectations but concerns about service sector inflation. Interestingly the Bank of England recently unveiled its own measure of “supercore” inflation (services, excluding administered prices, rents, holiday travel and volatile items) which might warrant more attention for the rest of this year.
On the back of this economic data, the market is pricing in about 0.5% off UK interest rates and oscillating between 0.75-1.25% off US rates by year end currently.
Growth assets
Turning to growth assets and the technology sector, putting Nvidia to one side, five of the ‘Magnificent 7’ major stocks reported revenue or profits growth of 5-22% in Q2, with Tesla reporting a loss. Whilst these are perfectly decent numbers, they are not so strong as to justify their very high valuation point.
Factor performance
Looking at factor performance over August, the Quality and Momentum factors were the best performing, whilst Small-Cap stocks were the relative laggards as more economically sensitive areas suffered in the wake of more negative sentiment around economic growth in the US and beyond.
Defensive assets
Turning to defensive assets, they once again acted as a hedge for volatile growth assets, with correlations moving into negative territory.
Market insight August 2024 – summary
In summary, the economic consensus sees a ‘Goldilocks scenario’ appearing, where growth and inflation data are low enough to warrant a series of interest rate declines across the Western economies, but not too low so as to indicate an actual recession or downturn in corporate profits. Valuations matter little to momentum driven investors, but US stocks remain very expensive on a historical basis. The high point is approaching for political risks in the US due to the short-term election uncertainty, so as ever, time in the market remains key, as does the need to hold a diversified portfolio of assets.
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