Investing & Performance | 5 September 2024
Monthly update: Markets restored amid solid company performance
Despite an uncertain start to the month, markets soon recovered and are now looking forward to the first US interest rate cut in four years.
WHAT’S HAPPENING IN FINANCIAL MARKETS?
It was a volatile start to the month due to concerns over some US economic data, but markets soon recovered to previous levels. The US economy is slowing but still growing and companies are reporting solid earnings, so we continue to see a positive landscape for stock market investing.
Investors were spooked over concerns the world’s biggest economy could be heading for a sharp slowdown, largely due to disappointing jobs numbers. Markets bounced back after they realised the situation wasn’t as severe as initially thought, and as expectations of an imminent US interest rate cut rose.
We said in our last monthly update, published as the volatility struck, that concerns about a major US slowdown appeared overdone and we saw few fundamental reasons to justify them.
“We continue to see favourable conditions for equity investing this year.”
Joe Aylott, Investment Strategist at Coutts
Focus on economic growth
Central banks are now shifting their focus away from controlling inflation, which has settled, to safeguarding economies and fostering growth. As a result, we’re seeing a global trend of interest rate cuts. This is potentially positive for investors as lower rates encourage people to borrow and spend and can support share prices.
The UK’s Bank of England and the European Central Bank have already cut rates, as have other central banks around the world, and the US now looks certain to follow suit this month. US Federal Reserve Chair Jerome Powell practically announced a September cut at the Jackson Hole Economic Symposium last month, saying “the time has come for policy to adjust”.
Joe Aylott, Investment Strategist at Coutts, said that, despite positive conditions overall for markets, investors should expect some “bumps along the way” over the rest of this year.
“Following a remarkably strong first half of 2024, we anticipate some increased volatility as economic growth slows and markets digest US election uncertainty," he said. "But overall, looking at the bigger picture, we continue to see favourable conditions for equity investing this year. And we include a range of diversifiers in our client portfolios and funds to help handle any market fluctuations.”
The value of investments, and the income from them, can go down as well as up, and you may not receive the amount of your original investment. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.
WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
Although our analysis had already shown signs of a softening US job market, we still see solid long-term economic fundamentals. As a result, we continue to favour stocks and have adjusted our holdings to adopt a more global focus.
With an eye on any potential volatility over the rest of this year, we continue to hold well-diversified portfolios and funds.
Our investments include US government bonds, which should provide some ballast if stocks drop. And we hold a fund that uses ‘liquid alternatives’ to provide diversification even if stocks and bonds fall together – not something we expect any time soon, but possible over the long term should inflation creep up again.
Other recent adjustments to portfolios and funds include locking in profits and exiting our positions in gold and high yield bonds. We held gold for its diversification benefits in case inflation exceeded market expectations. But with that risk now diminished and gold outperforming expectations, we chose to take profit from our remaining position.
Similarly, in line with our 'Anchor & Cycle' investment approach, which emphasises taking risks where they are most rewarded, we decided to close our high yield bond holdings as their yields have tightened relative to less risky alternatives.
THIS MONTH’S SPOTLIGHT: WELL-EARNED COMPANY RESULTS
It has been a solid earnings season with most companies performing strongly relative to expectations. For the most part, those earnings are expected to keep growing this year too – all strong justification for our current, pro-stock stance.
In the US, more than half the businesses which have reported their financial performance announced better-than-expected sales as well.
The technology giants that drove US stock market performance for much of this year are still performing well, beating earnings predictions, but we’re seeing solid performance elsewhere too. The financial and healthcare sectors, for example, also saw many stocks perform strongly, whereas the energy sector was disappointing.
Looking ahead, analysts expect third-quarter US earnings to continue to grow year-on-year, with trends broadening across the market.
As for Europe, Coutts’ Equities Specialist Richard Way said: “European companies outperformed both earnings and sales expectations, with notable strength in the financial sector, particularly European banks. However, the materials sector, especially metals and mining, has faced challenges, and luxury goods companies have struggled with disappointing results.
“European earnings growth is expected to be modest in 2024 but should improve significantly in the coming years.”
Clients can find out more about our investment approach by speaking to their private banker.
The above article has been written and published by Coutts Crown Dependencies investment provider, Coutts.
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