August 2024
Although it may be summer and peak holiday season in Ireland, there’s certainly a lot happening.
- The excellent performance of Ireland’s Olympians so far is definitely lifting spirits.
- The switch from Biden to Kamala Harris is a game changer, reigniting the US presidential election.
- We’ve experienced a strong run in equity markets over the first seven months of 2024, though as I write we’re experiencing a reset of sorts in equities.
- Following the ECB, the Bank of England has become the second major central bank to cut interest rates. We expect the US to follow suit in September, with another potential rate cut from the ECB as well.
- Risks in the Middle East have escalated following the assassinations by Israel of key Hezbollah and Hamas leaders in Lebanon and Iran.
July and YTD Market Numbers
Inflation
The slight increase in Eurozone inflation in July, from 2.8% to 2.9%, underscores the potential challenges and volatility on the path to achieving the target 2% level.
US Presidential Election – Game On
The US election is once again a heated contest. What a difference a couple of weeks can make in politics.
On June 27th, Biden’s disastrous showing in a CNN debate caused serious concern among Democrats. Then, there was an assassination attempt on Trump, which briefly allowed him to appear as the chosen one. This was followed a week later by the Republican convention, where he nominated JD Vance as his running mate. The convention fostered a growing sense of a united Republican party and a leader attempting to remake himself as the unity candidate.
Biden subsequently bowed out. Within hours, Kamala Harris had secured the backing of her party and, within days, had raised record sums of money for an energized campaign, securing all the key endorsements. Suddenly, Trump’s position seemed less certain, and Kamala’s “they are just weird” narrative started to resonate, energising the Democrats and frustrating the Republicans.
The latest CBS/YouGov poll shows Harris has closed the gap with Trump, putting them neck and neck both nationally and in key battleground states. The following JP Morgan graph – shows the same thing – significant resetting of market probabilities based on a changed race. Game on!
Source: JP Morgan as of 4/8/24
Equity Market Reset
While equity markets ended up approximately 15% higher at the end of July, a reset seems to be occurring in the first few days of August.
Source: All country world equity returns to a Euro investor. Index rebased to 100 as at 31.12.23
This shift is driven by several factors:
- Further evidence of a slowing US economy, highlighted by a weaker-than-expected recent jobs report and resulting higher unemployment.
- Concerns that the Federal Reserve has been too slow to cut interest rates, with the first cut expected in September.
- Questions about whether the significant capital spending by big tech on AI will yield a return on investment.
- Changes in the probabilities regarding the US presidential election.
- A sense that equity valuations had become “very full,” making a setback seem overdue.
- Headline stories about Intel cutting 15,000 jobs and Berkshire Hathaway cutting its stake in Apple by nearly 50% only added to the nervousness about tech stocks.
The shift in sentiment resulted in a spike in equity market volatility as can be seen from the VIX index below. The spike toward 60 is significant in the context of an index that often hovers below 20.
Source: CBOE
We will continue to watch how this equity market setback plays out to see if it develops enough to create a buying opportunity for our clients.
Pull Back in Big AI Players to be Welcomed
The pull back in recent days means that S&P 500 is down 7% over the past month with the likes of Nvidia and Amazon down over 20%.
Source: Tradingview
While earnings have been strong, the market is clearly sensitive to large companies spending heavily on AI infrastructure, with uncertainty about whether future returns will justify the investment. In my view, we are only at the beginning of the productivity increases and innovations that AI will bring. Currently, we are facing capacity constraints in power, data centres, chips, and other areas, which are limiting growth. Therefore, I see the recent setback in prices as a healthy correction for the markets.
S&P 500 Sector Concentration
The following graphic is interesting. It shows the largest company in each sector of the S&P500. It also shows the top 10 companies’ share of sector market cap.
Source: Visual Capitalist: Charted: The Largest Company in Every Sector of the S&P 500 (visualcapitalist.com)
Our Investment Outlook
The year has started positively, and the recent setback in stock prices was not totally unexpected, as the market had anticipated many positive outcomes despite the various risks that we knew could disrupt markets.
Many of our clients have cash awaiting investment in equities. We will monitor if the current setback in equity markets develops sufficiently to create a good entry point. Holding cash is comfortable at the moment, with gross returns still above 3.5% per annum.
Overall, recent experiences underscore the importance of having a plan, maintaining a long-term perspective, and adopting a measured approach to investing. Working with your advisor and having a solid plan provides the confidence to stay the course and take advantage of market weaknesses.
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.
