This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our flagship discretionary portfolios. Clients with bespoke or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
After a tough start to August, equity markets around the globe performed positively, celebrating better-than-expected data out of the US (see below). In the US, the tech-heavy NASDAQ Composite index, rose more than the S&P 500, after having underperformed in recent weeks in the context of a mixed earnings season. European equities rose, too, just like their UK counterparts despite UK growth stalling in June. As market sentiment improved, the US dollar (USD) fell against most major currencies, except low-yeilding ones such as the Swiss franc and the Japanese yen. The USD also appreciated against the New Zealand dollar, as the New Zealand central bank cut interest rates last week.
Overall, we maintain well-diversified portfolios with a slight equity overweight. We have gradually increased that diversification over the course of this year to navigate an increasingly complex environment. Investors saw first-hand the risk of heightened volatility from demanding valuations in some markets, uncertain economic and earnings cycles, and (geo)politics. Our increased diversification has helped us mitigate some of these risks and puts us in a good position should volatility, which has now settled down, rise again.
A reassuringly healthy US economy
Inflation worries have cooled significantly over the past few weeks. Notably, US headline inflation came in at 2.9%, the lowest reading since March 2021, confirming expectations that the US Federal Reserve (Fed) is likely to start cutting interest rates in September, in line with our long-held expectations. The recent weakness in the US labour data led investors to start questioning the longevity of the economic cycle and whether the Fed has held interest rates in restrictive territory for too long, increasing recession fears. In our view, this explains the equity market correction at the beginning of August. However, part of the rise in the unemployment rate is due to rising immigration, not layoffs; plus, bad weather including hurricanes has temporarily impacted job creation. All in all, domestic consumption remains strong. Retail sales in the US soared 1% month-over-month in July, far better than the 0.3% gain consensus forecasts. This was the biggest retail sales increase since January 2023. In addition, strong earnings at Walmart also boosted confidence that the US economy is likely to experience a 'soft landing' (slower inflation and slower growth but no recession). The market is anticipating two cuts from the Fed, compared to five cuts expected two weeks ago.
UK and Eurozone economic activity in focus this week
This week, the purchasing managers' indices (PMIs) for the Eurozone, UK and Japan will be released (Thursday). It's widely expected that the manufacturing sector will remain depressed in the Eurozone and Japan, though it should remain in expansion territory in the UK. As services activity has supported growth in most economies, investors will be keeping a keen eye on the August PMI prints, particularly in Europe. European economies had a much better start to 2024 than expected. We believe European economies will continue to grow, mainly because of better real income (adjusted for inflation). Interest rate cuts by the European Central Bank and the Bank of England will also further support these economies.
Central bankers meet in Jackson Hole
We'll be closely watching the annual meeting of central bankers at the Kansas City Fed's annual economic symposium in Jackson Hole (Thursday to Saturday). This meeting gives the Fed's Chair, Jerome Powell, a chance to provide an updated assessment of the US economic trajectory and the outlook for monetary policy before the Fed meeting in September. Last month, Powell said that if inflation and the labour market continued to cool, an interest rate cut could be on the table. The recent weakness in the labour market, combined with inflation below 3% will, we think, allow the Fed to deliver a first quarter-point cut in the Fed funds rate next month. The latest Fed meeting minutes will be released on Wednesday, perhaps clarifying the latest thinking of policymakers. The day before, on Tuesday, the Swedish central bank is widely expected to lower interest rates too, to 3.5%. This would be the second cut in this monetary policy cycle.
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Information correct as of 19 August 2024.
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