March: AI Surge and Economic Optimism Fuel Global Stocks to New Highs

April 2024

Global equities have had their strongest first-quarter performance in five years, up close to 10% in local currency terms, driven by increasing evidence that the US may achieve a soft landing and enthusiasm for the potential of artificial intelligence (AI).

• The S&P 500 reached a record high on 22 different days during the quarter.
• AI has propelled the market’s gains, with chip maker Nvidia adding over $1tn in market value in the first three months.
• What started as a tech-led surge in the US gradually spread with stocks in Europe and Japan starting to outperform the US as the quarter progressed. The UK’s FTSE 100, Germany’s Dax, France’s CAC 40 and Spain’s Ibex 35 all did better than the S&P 500 in March.

Central bank interest rates have peaked in most advanced economies, with the Swiss National Bank starting the loosening cycle with a surprise cut in March. The price of Brent Oil price has spiked, hitting over $91 a barrel last week amid growing risk of a widening of the Middle East conflict.

The price of Brent Oil price has spiked, hitting over $91 a barrel last week amid growing risk of a widening of the Middle East conflict.

Month and YTD Market Numbers

Markets Focussed on When Interest Rates Might Fall

The market is paying a lot of attention to when interest rates might drop. In the US, Jay Powell’s recent remarks seemed to calm the market by reiterating that the Federal Reserve looks at the data and will lower rates when inflation is under control, which they cannot claim yet. The date of the first rate cut is still unclear, and the market is giving about a 60% probability of a June move. It is worth noting that the market has changed a lot over Q1 from anticipating six rate cuts to now forecasting three, or around 0.75% of a cut, by year end.

The ECB is likely to cut interest rates sooner rather than later and we will learn more from Christine Lagarde when the ECB meets this week. Going into that meeting we note that inflation fell further in March in the EU and is now in shouting distance of the 2% target.

Global Equity Supply Reducing

A recent article in the FT caught my attention. The article pointed out that:

• The US has seen the number of listed companies drop from more than 7,000 to less than 4,000 since 2000;
• A similar trend has occurred in Europe and the UK; and
• The global availability of public equities has shrunk by a net $120bn so far this year, as companies repurchase more shares than they issue.

This seems to be driven by several factors:

• Continuing unease among executives: Despite soaring stock markets and better economic outlooks, many executives are still not convinced that the situation is stable and remain concerned about interest rates and the unpredictability of the US presidential election. As a result, they are hesitant to use the strong markets to finance investment, and instead opt to use cash for share buybacks.
• Companies favouring private markets: Smaller companies seeking funds are cautious of the financial and regulatory costs of being public and are favouring private markets, reducing the number of listed companies in the US and Europe.

Our Investment Outlook

The year has started positively, and the outlook has gradually improved since the turnaround last October. However, we are aware that markets have already anticipated a lot of positive outcomes and that there are still risks that could disrupt markets later in the year. Therefore, we remain somewhat careful and are less keen to have clients increase their equity holdings at these prices.  Of course, holding cash is comfortable when gross returns available are currently circa 3.9% p.a. Overall, these factors underscore the need for a measured approach to investment in the coming year.

Challenging Traditional Investment Advice

Many investment advisors think that the best way to balance risk and return is to have a portfolio with a combination of stocks and bonds. The most common portfolio mix is 60% stocks and 40% bonds, which is known as the 60/40 portfolio.

A paper “Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice”, published last year[i] has generated a lot of interest and debate among the financial community lately. It questions conventional investment advice by proposing that a portfolio made up of only global stocks could perform better than traditional mixed asset portfolios over the long run. This proposal is based on extensive simulations and data analysis covering many countries and over a hundred years.

I have always thought that when it comes to investing it is important to have a clear set of investment principles. It is also important to test those principles from time to time. Clients have heard us say that stocks are the main source of growth in their portfolios, over the long-term. Clients also know that while others are critical of the traditional 60/40 portfolios based on recent performance, we are suggesting our clients take advantage of the higher expected returns now available from cash and bonds.

Our view is that the paper supports our core principle that investors with a very long investment horizon can allocate a large amount to global stocks and expect it to be the main contributor to their long-term returns.

Happiness

“Happiness is not something ready made. It comes from your own actions.” — Dalai Lama

Our philosophy as financial advisors is that money has limited value in its own right. We encourage our clients to focus on what the money can enable in terms of positive experiences for the people they care about.

And when it comes to where to live, it turns out Ireland ranks number 17 on the happiness scale.

John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.