Signia Invest Insights | July 2024
Market Review and Outlook
- I have always been amused by the investing adage “sell in May and go away”, referring to the historically weaker performance of stocks from May to October compared with the other half the year. Why would anyone want to miss the volatility in markets that opens the door to investment opportunities? Why would any investor who has an iota of interest in markets choose to miss all the action? Well, July and in particular the start of August have indeed been action packed, so for those who have been sitting on a beach somewhere here is what you missed…
- July was a month of two halves with the first half seeing the S&P 500 hit a further succession of record highs. Bonds also rallied as speculation mounted that the Fed would cut interest rates in September, particularly after a weaker than expected US consumer price inflation report. But risk assets began to turn halfway through the month, with the Magnificent 7 and Nasdaq experiencing significant peak-to-trough drawdowns and entering technical corrections. In addition, commodity prices lost ground across the board, with significant declines among energy prices, industrial metals and agricultural goods.
- As noted in last month’s commentary, Q3 has seasonally been the weakest quarter for equity markets, so during thin summer market liquidity and after such a protected bull market rally, it is not surprising that markets are weaker and now experiencing elevated price volatility. Overall, world equities still managed to post a positive gain of 1.5% in July, however, these gain were wiped out at the start of August. Fixed income assets from sovereign debt to investment grade and high yield credit performed strongly during the month, with the global aggregate bond index rising 2.1% to bring the asset class into positive territory year-to-date.
- The finger of blame for the market volatility can be pointed at a large list of culprits, but the underlying root cause and fuel to the fire came from the Bank of Japan and US Federal Reserve, which made two perceived hawkish decisions only hours apart on July 31st. The Bank of Japan and subsequent Yen strength is discussed below, but the decision of the Fed to hold interest rates steady in a restrictive 5.25 to 5.50% range whilst concerns over a fast-deteriorating US labour market are rising (albeit from a position of historic strength), and the fact that many central bank peers have already started lowering interest rates to support their respective economies (the BoJ being the major exception), was ultimately what helped spark the early August stock selloff and bond rally. This was the market’s warning shot across the Fed’s bow to refrain from further delay and promptly begin lowering US rates at its next meeting in September, with over 100 basis points of rate cuts now priced in by year end over the Fed’s three remaining meetings.
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