Market insight June 2024
In our market insight June 2024 review we look at the close of the second quarter and overall, it was another positive period for growth assets. US markets remained a key driver, helped by technology stocks once again.
The timing of interest rate cuts was a theme that dominated financial markets over the period, and it was clear over the quarter that global rates would in fact be ‘higher for longer’. As a result, this impacted defensive asset returns.
The economic picture
Starting with the economic picture, as was widely expected, the ECB cut its interest rate to 3.75% from 4% last month and was the first major western central bank to move on rates.
US economic data softened over the quarter and has been below consensus since early May. However, weaker US consumer data meant that investors remain slightly more hopeful for policy easing and markets currently continue to factor in two cuts by the end of the year.
Despite UK inflation returning to its 2% target in May for the first time in nearly three years, strong underlying price pressures all but ruled out a pre-election interest rate cut, particularly due to services inflation. The result of this higher inflation is consumer prices in the UK are up more than 20% over the past three years.
Politics and financial markets
Politics has also created a lot of noise in financial markets over the quarter. In France, President Macron’s unexpected announcement of a French election has had a noticeable impact on the Euro and European bond yields. The UK has gone to the polls in the general election and the outcome of the US elections seems currently uncertain, which might create some short-term volatility.
Growth assets
Turning to growth assets, US equity market performance has been encouraged by the surge of interest in AI, and the general profitability of the US corporate sector. Interestingly, the Tobin’s Q, a key replacement cost ratio and a valuation measure of the U.S. markets has reached its highest level since records began in 1945. This need not suggest an immediate sell-off, simply that future returns should be rather lower than the immediate past.
Factor performance
Turning to factor performance, growth and momentum were the best performers over the quarter. Value and small-cap were the relative under-performers over the last three months.
Defensive assets
Over Q2, European and US high yield were the top performing fixed income sectors. Both sectors were assisted by healthy coupon payments and the benefit of being less sensitive to higher government bond yields experienced in the major economies. UK and US 10-year yields continued to be driven by rate cut expectations and ended the quarter marginally higher.
Market insight June 2024 – summary
In summary, the timing of interest rate cuts, the health of the US economy and the success of technology were the prominent themes throughout the second quarter of the year.
As we enter Q3 financial markets remain focused on the uncertainty of major economy elections. However, history tells us that in both the UK and US this is purely short-term noise in the context of financial market returns, whichever political party holds power.
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