Monthly Market Commentary - March 2024

Macro outlook

What's happened:

Global stock markets extended their rally in February as US equities powered the MSCI AC World index to a sizable 5.2% monthly return, in sterling terms. There has been a subtle, yet notable shift in the market’s main driving force towards forecasts of economic strength — boosted by resilient labour markets and growing hopes for Artificial Intelligence (AI) benefits — while expectations of interest rate reductions have waned.

Measures of inflation showed little change overall, as the UK consumer price index (CPI) came in at 4% year-on-year, the same as the prior month and marginally higher than the 3.9% seen in December. The Eurozone figures fell to their lowest level of this cycle and although the US CPI showed a smaller than expected drop, the US core personal consumption expenditures price index — believed to be the favoured metric of the Federal Reserve —came in at 2.8% annually, in line with expectations.

This holding pattern in price pressures above central bank targets, along with solid employment numbers, has caused interest rate markets to pare back forecasts for cuts. Heading into 2024 there were high hopes for a substantial lowering of key central bank base rates this year, but these forecasts have since been walked back somewhat. Futures markets are now pricing four 25 basis point reductions in the Fed funds rate by year end, down from seven previously, with the first move expected to come in June.

What's ahead:

Monetary policy updates from the Federal Reserve (Fed), Bank of England (BoE) and European Central Bank (ECB) in the coming weeks top the agenda. Although no changes are expected at the trio of March meetings, investors will be watching closely for hints towards, or against, moves in the early Summer.

Economic data, particularly jobs figures, will continue to be of utmost importance. A significant weakening on this front could force central banks out of their apparent current stance of adopting a wait-and-see approach. After being too slow to react to rising inflation, there remains a concern among rate setters that they may declare victory too soon, before high inflation has been fully curbed.

The geopolitical and political environment remains uncertain and developments on this front could swiftly play through to financial markets. The oil price recently reached its highest level since November and a further rally may lead to the return of heightened inflationary fears.

US equities outperformed global benchmarks in February, with mega-cap technology stocks at the forefront of the advance. Nvidia delivered a stellar set of results, reporting a 265% increase in quarterly revenues alongside upwards revisions to future sales forecasts. The stock posted the largest daily increase in market capitalisation in history in response, posting a staggering rise of over US$275bn to take its market cap past US$2tn and become the third-most valuable US-listed company after Apple and Microsoft.

An intriguing observation was the impact the move had not just on US markets but further afield, demonstrating a wider-ranging positivity to the results. Given the preponderance of media coverage on the Magnificent Seven mega-cap tech stocks, it is perhaps surprising that while they have outperformed the broader market since this rally began in October, the level of outperformance is not great. In the last four months technology has been the best performing US sector, returning a little over 30% but financials, communications and industrials are not far behind.

UK stocks continue to lag not only US peers, but also their European counterparts. A higher representation of value stocks at the expense of growth and a greater proportion of unloved sectors has weighed on UK benchmarks. Concerns around the Chinese economy have also provided a headwind.  

Overall, we remain positive on equities, but are mindful of the size of the gains in the last few months. Valuations and sentiment indicators are starting to get stretched towards the upper end of ranges. There is currently a fair amount of good news in the price and several potential risks on the horizon, such as central banks continuing to refrain from easing policy, a second round of inflationary pressures, political uncertainty etc. 

Bond markets drifted lower in February, as progress on inflation stalled and expectations for central bank rate cuts were reined in. Returns were similar in the UK, US and Eurozone, in local currency terms suggesting that there is not a great amount of difference between the regions at present with the focus very much on when interest rate reductions will transpire.

We believe current market pricing for the future path of interest rates is now more realistic and it remains likely that we are at the peak in rates. Adding to the positive outlook for bonds, inflation is likely to fall further in the UK and growth outside the US is seen as fairly sluggish. On the month, the short end of the curve held up a little better in the UK while linkers outperformed.

The oil price has attracted greater attention in recent weeks as it rose to four-month highs. An extension of the OPEC+ voluntary production cuts is intended to support the market which is up around 6% since November. Saudi Arabia, the de facto leader of the cartel, has led the way, producing 1m barrels per day less since July.

Gold ended February little changed but embarked on a strong move higher at the start of March to trade around US$2100/oz and close to the all-time highs seen in early December.

The pound has been confined to an unusually narrow range against the US dollar thus far in 2024, with February the second-tightest monthly range in over three years and January the tightest! A convergence of monetary policy paths and similar trajectory in economic data, albeit from a higher base for the US, has provided no reason for the market to break out of the 1.25-1.28 range.