QUARTER THREE 2024 SUMMARY

Early in the third quarter of 2024, the seemingly inexorable rally in the tech sector finally looked as if it may be dissipating, particularly in the US, as smaller companies and defensive (or ‘old economy’) stocks showed gains on the expectation there would be a coordinatedcut in interest rates across many developed market economies. The ECB started the trend at their June meeting, cutting from 4% to 3.75% which led investors to anticipate similarly dovish policy announcements from the US Fed and Bank of England (BoE). Equity markets were however disappointed by the central bank prevarication in loosening monetary policy (the Fed and BoE did not want to move prematurely). Then in early August, a cut in the BoE rate coincided with biggest fall in the Japanese equity markets since 1987 as the Japanese Central Bank (JCB) moved monetary policy the other way to try to bolster the falling Yen. This reverberated across equity markets as Europe and, later in the day, the US awoke to a violent move down by the Japanese indices and had to try to assess the impact of such an extreme sell-off. The markets did not like the fact that the JCB was tightening monetary policy, in one of the largest global economies, while the US Fed appeared to have missed its opportunity to loosen monetary policy at what appeared to be the optimum moment for the US economy.

Fortunately, the fall-out was relatively shortly-lived and markets recovered the majority of their losses within a few days but almost entirely by the end of August. Inflation continued to fall, signalling a likely cut in US interest rates, and some of the concerns about the US economy in particular were beginning to abate. But once again, in the fast-changing world of finance, concerns about the bellwether US economy began to give risk markets the jitters in early September, immediately before the US Fed’s rate decision. We have talked about taper tantrums before and in mid September, right on cue, the Fed delivered its 0.5% (50 basis points) cut. Stocks have crept higher since the reduction. Not wishing to be left out, the Chinese launched an economic stimulus package which instigated a 29% rise in the Shanghai Composite in just a few weeks. The subsequent 10% fall illustrates (frustratingly) the likelihood that this may be another ‘false dawn’ and a failed attempt to stimulate an ailing behemoth. NB: Our portfolios’ exposure to China is negligible – this is deliberate – as we do not want exposure to such a volatile market which is driven more by policy than company prospects and fundamentals.

INTEREST RATES

As mentioned above, markets appear to remain robust and sanguine despite the increasing geopolitical tensions and nervousness about the global economy. Some of this anxiety seems to be caused by the slow pace of interest rate reductions. One of the markets’ mechanisms for instigating looser interest rate policy and/or an increased level of stimulus (as seen throughout the 2010s) is a sharp sell-off immediately prior to a meeting of central bankers and policy makers. This is sometimes seen as the market strong-arming policy makers to implement more fervent and fast-paced mechanisms to ease market concerns than they may have wanted to. Jerome Powell, the current Federal Reserve Chairman, appears to be more data driven than his predecessors and cares less about appeasing markets which may mean we have some more volatility ahead of us.

There is still an expectation interest rates will be notably lower in 2025 and 2026 – as indicated by interest rate swaps data (Bloomberg, September 2024) – however, the journey to lower rates will be key. Should central banks and policy makers oversee a smooth and well- executed transition to lower rates, the markets’ reaction is likely to be similarly smooth. We could be heading for the nirvana of a transition to a normalised monetary policy backdrop (interest rates) and a soft- landing for the global economy. While history tends not to repeat itself exactly, it does rhyme and enabling the aforementioned factors to develop harmoniously will be the acid test for central bankers. Should markets become frustrated by perceived policy procrastination, it could make for some interesting trading days.

COMMENTARY

Barely a day goes by without some kind of notable event. Some lay the blame on 24-hour news coverage. Others blame social media. It may just be the 21st century generally and the wholesale shortening of time and speed at which everything appears to happen in this brave new technological world. Some of those events (in no particular order): the ongoing destabilisation of the Middle East, the impending presidential election in the US and Autumn Statement in the UK, hurricane Milton, the Tory party leadership race, wholesale changes to workers’ rights… I could go on.

Certainly, for most UK residents, the most notable event will be the upcoming Labour budget (we hope you have seen our budget note, sent out in September, outlining some of the potential changes). The level of conjecture regarding Ms. Reeves is now filling more column inches than the Conservative leadership contest, of which the winner will not be known until after the budget. Whilst we have considered in our note a number of potential outcomes, we will only then have clarity as to what changes have been made and how they will affect our clients.

Whatever it is, we remain abreast of it and the potential impact these factors can have on your portfolios and financial decision making.