Wall Street was closed last Wednesday (a public holiday in the US), but despite the shortened trading week, it still recorded gains. Indeed, the S&P 500 Index even recorded yet another all-time high. More importantly, there are signs of a broadening out across the market – and some rotation –, with those unloved value stocks outperforming growth stocks. Most of the major benchmarks even outperformed the relentless tech-heavy NASDAQ Composite Index – something which has not happened for many weeks.
Significantly, Friday was “triple-witching” day in the US: some US$5.5 trillion in stock options, stock index futures, stock index options and exchange-traded funds all expired simultaneously, a convergence that can lead to increased trading activity and volatility in the financial markets (according to Bloomberg and options platform SpotGamma).
Rising stock markets and house prices have driven household net wealth to new highs, encouraging spending. But this wealth is far from equally distributed: low-income consumers remain under pressure from rising prices.
And there is data to suggest that easing labour demand and a dwindling savings rate might result in caution among consumers. The US consumer has been the cornerstone of US economic growth over the past three years, driving not only strong domestic performance but also helping to sustain global economic expansion.
Even just the tiniest indication of consumer fatigue – or a downturn – in consumer spending would damage the economy. In periods of consumer fatigue, sectors such as utilities, healthcare and consumer staples tend to be less volatile. Energy and infrastructure stocks, on the other hand, have been the hardest hit in recent recessions. Financials are also hit due to rising default rates and shrinking net margins.
But as long as inflation continues to cool and consumers remain employed, economic expansion and the bull market should remain fairly intact. Some commentators continue to believe, however, that a recession cannot be ruled out. A global or US recession is not the base case over the short term, however, according to a recent monthly fund manager survey. A soft landing and a path towards interest rate cuts remain the most likely outcome. Debate over just how many rate cuts and over what time frame continues to rage.
As expected, the Federal Reserve Bank and the Bank of England announced last week that their key interest rates would remain unchanged following publication of the most recent inflation data. The European Central Bank, however, announced a quarter-point cut reversing a five-year trend. Since it was founded in 1999, the ECB has only ever cut rates when the Federal Reserve Bank has done so first.
ECB President Christine Lagarde was quick to point out that the bank was not in any way committing to any further interest rate moves in the short term. The Swiss National Bank also lowered rates (by the same amount) on the back of easing inflationary pressures.
Europe's political landscape is complex: France’s Emmanuel Macron is grappling with the plummeting popularity of his own party and the EU is highly critical of the country's excessive debt. And as the EU is moving to regain control over deficits and debts (with somewhat more flexibility than in days gone past), Macron and other EU countries might find themselves caught up in future turbulence. Polls are predicting heavy losses for Macron in the National Assembly.
Further east, President Putin met his North Korean counterpart and they both signed a new comprehensive strategic partnership. The signing reportedly provides for a mutual defence pact and was much covered by Russian state media. The West, meanwhile, has been concerned over the implications of Putin's first state visit to the nuclear power and the alignment of two pariahs of the international community.
In recent months, the Japanese stock market has drifted lower since its peak in March 2024. Uncertainty over the central bank’s monetary policy outlook and its impact on borrowing costs have combined to weigh heavily on sentiment. The Bank of Japan’s Governor, Kazuo Ueda, reiterated that a July rate hike cannot be ruled out, depending on data. In the currency market, the yen has weakened against the US dollar. It is now hovering around a fresh 34-year low as it continues to suffer from US-Japanese interest rate differentials.
Over the coming years, however, Japanese banks and investors will most likely sell out of their positions in US Treasuries, effectively unwinding the hedged dollar-yen carry trade. This will put pressure on Treasury prices, causing them to fall and yields to rise, while at the same time strengthening the yen and the Japanese bond market. Norinchukin Bank was the first to announce its intention to unload US$63 billion of foreign bonds.
Closer to home, the Conservative Party's fortunes show no signs of improving between now and the polling date. Rishi Sunak could even become the first Prime Minister in history to lose his seat. Some polls are suggesting that the Tories could be left with a little over 50 seats – just ahead of the Liberal Democrats. The Labour Party, meanwhile, looks set to enjoy a landslide victory.
As the second half of 2024 comes in to view, the challenge is going to be to tap into the potential offered by equities and unlock the exciting long-term opportunities that remain available in many sectors and regions across the world.
Despite concerns over “bubbles” in the US tech sector, the US stock market rally is backed up by strong growth, accelerated corporate earnings and burgeoning enthusiasm around AI. Lower inflation and the prospect of interest rate cuts are opening up attractive investment prospects in those sectors and regions that have not benefited in the current bull market: investors are therefore starting to tilt their asset allocation towards sectors outside of the tech sector.
