Monthly Market Commentary - September 2024

Stock markets recovered from a bout of strong selling in early August to end the month slightly higher. A series of factors contributed to the market swoon, as corporate earnings from market leaders, central banks refraining from strong dovish shifts and a soft US job report weighed on market sentiment. The selling accelerated as technical factors, such as the unwinding of carry trades after Japanese interest rates were raised and potentially lower liquidity due to summer markets, exacerbated the declines.

Fast forward three weeks until the end of the month end and stocks benchmarks in the US, UK and continental Europe were back near their all-time highs, leaving several observers returning from their summer holidays to wonder what all the fuss was about. While there were some negative fundamental developments during the month, they did not befit the size and speed of the decline, and broadly speaking equity markets continue to be supported by solid earnings while attractive valuations and central banks lowering rates are good news for bond holders.

UK and Eurozone equities outperformed the US in August, largely due to favourable currency movements. After a soft and volatile start to the month equity markets were remarkably calm for the rest of August, gradually recouping losses before turning green on the month. The declines were due in part to fundamental developments, but the speed and swiftness with which they occurred was likely more reflective of technical factors, like the unwinding of carry trades.

From an equity perspective the market reaction to what were, on the whole, solid results from the Magnificent Seven stocks provides the clearest indication yet that some of the euphoria surrounding artificial intelligence and its positive impact on large US tech stocks has faded. This could be seen most clearly with Nvidia, the bellwether stock of the AI-fuelled rally. Nvidia reported earnings at the end of the month when benchmarks were back near record highs but despite announcing a doubling in revenue the market viewed the results unfavourably.

When Nvidia announced its latest results, it was sitting on gains of around 800% in two years, a US$3tn+ company and accounted for a roughly 6% weighting in the MSCI North America index (accurate as of 31 July). Nvidia fell more than the broader market during the correction but also enjoyed a strong bounce in the subsequent recovery. However, it failed to reach new highs and its all-time peak in mid-June now serves as a potential reference point for market leadership. Since that date tech stocks have been one of the poorest performing sectors and 4 of the Magnificent Seven have underperformed the benchmark. Meanwhile value stocks have outperformed growth stocks. It is too early to be sure of a regime change yet, but there are growing signs to suggest it is underway.

The US jobs report showed 114k jobs added in July — lower than expected and the slowest pace of hiring in three months — and a move higher in the unemployment rate to 4.3%. This gain in the unemployment rate attracted plenty of attention as it triggered the Sahm Rule, when the three-month average unemployment rate rises 50 basis points (0.5%) above the minimum three-month average over the previous 12 months. However, Claudia Sahm, the economist and creator of the Sahm rule, expressed scepticism regarding an impending recession.

In our view, as long as layoffs remain low, the US economy is unlikely to experience a hard landing. We still believe we are heading for a soft landing but recognise the need to wait for upcoming data points to support or refute this opinion.

Interest rate markets are pricing in 100bp of cuts from the Fed by year end, meaning that with just three 2024 policy meetings left the expectation is for at least one 50 basis point cut. The US economy has been a leading light for growth since central banks embarked on rapid monetary policy tightening but there is now a greater concern regarding its strength compared to European economies that have continued to defy predictions for prolonged recessions.

In the UK the focus is shifting towards the Autumn Budget, although with chancellor Rachel Reeves repeatedly ruling out increasing the deficit we do not see it as a major market mover for rates. At the margin, if taxes increase as they are expected to, it could provide an economic headwind and lead to a short-term slowdown. This could lead to a monetary policy response, with the BoE cutting rates a bit more than currently priced in. That said, inflation and unemployment dynamics will likely trump any fiscal changes in terms of importance. There are currently around 40 basis points of BoE cuts priced in by year end.

Interest rate differentials between the BoE/ECB and Fed contributed to a rise in sterling and the euro against the US dollar in August. Both the GBPUSD and EUR/USD rates have rallied to trade close to their highest levels of the year with markets pricing in more US cuts. Gold has returned back near its highest levels of the year, gaining in August and supported by the US dollar depreciation.

Brent crude could be one to watch as a potential signal on global economic strength, with prices returning back towards 2024 lows despite ongoing geopolitical tensions in the Middle East and Russia. Recent reports suggest that OPEC+ could be set to proceed with an output increase as soon as October, as part of a plan to begin unwinding the 2.2m barrels per day cuts that they have implemented to support the market.

Conclusion

Global equities have largely consolidated during the summer months, following a strong run higher over the past 12 months (MSCI AC World +19.6%). Employment data has taken on a greater importance among investors and central bankers of late, as concerns rise about the slowdown in growth. Economic surprise indices in the US and Eurozone have been negative in recent months, suggesting more downside surprises to data than upside. Stocks are reflective of this with defensive equities are outperforming while weakness in the price of oil and copper also suggests growth concerns.

However, we still believe a soft landing is the most likely outcome but continue to vigilantly look for signs that this may not be the case. Second quarter corporate results were good on the whole, with the US beating expectations by around 5%. European updates were also above forecast, although not quite as strong. Strong earnings continue to fundamentally support stocks while attractive valuations and central banks entering, or already in, rate cutting cycles is positive for bonds.