The brief reset in the equity markets experienced at the start of August proved short-lived, as markets finished the month with a slight gain. However, it feels like déjà vu with equity markets turning downward again at the start of September. This market activity serves as a reminder that volatility is an inherent part of investing. The key question for investors is how best to endure these downturns to benefit from the long-term power of compounding returns.
On the inflation front, the latest numbers show that annual inflation in the US, EU, and UK is now below 3%, marking continued progress towards the 2% target.
There were no surprises from the annual Jackson Hole Economic Symposium. We expect the US Federal Reserve to begin cutting interest rates this month, with the ECB likely to make its second rate cut.
Berkshire Hathaway’s market valuation crossed the one trillion USD mark for the first time in August, a significant milestone.
Geopolitically, Ukraine has re-energised its war efforts following a successful deep incursion into Russian territory, reversing a period when Russia seemed to have the upper hand. Meanwhile, the Middle East remains highly volatile, with prospects of a ceasefire proving elusive for now. The humanitarian crisis in Gaza continues to worsen, and polio vaccines are now being rolled out to mitigate the increasing risk of polio, exacerbated by prolonged poor living conditions.
In US politics, Kamala Harris and the Democrats had a strong month against Trump, putting them back in the race. The focus now shifts to how the last 60 days of the campaign will unfold.
August and YTD Market Numbers
Equity Market Volatility and Durability of Your Investment Plan
Source: MSCI, ACWI Euro investor. Index rebased to 100 as at 31.12.23 Performance from 31.12.23 to 4.9.24
The volatility we saw at the start of last month and again at the start of this month has prompted me to reflect on how investors should view and manage market fluctuations.
Volatility is a natural and unavoidable part of investing—it should not come as a surprise.
Rather than trying to avoid volatility, investors should focus on building a strategy that allows them to withstand it.
Investors must take enough risk to achieve strong returns but not so much that it compromises their ability to stay invested during downturns.
The key is to be prudent, taking manageable risks while prioritising long-term survival over short-term gains.
While leverage can boost returns, being over-leveraged limits the range of negative outcomes an investor can endure, thus weakening their resilience or durability in the face of down markets.
Ultimately, being a durable investor means having a plan, a long-term horizon (often 10 years or more), and a clear set of investment principles / beliefs. It’s also about maintaining flexibility in your financial plan to avoid forced selling and having a sounding board to help you stay the course during tough times, avoiding behavioural mistakes.
This is where an advisor comes in—helping you maintain discipline, navigate volatility, and stick to your long-term plan.
Inflation now below 3%
In August, headline inflation in the EU, US, and UK dipped below 3%, bringing it tantalizingly close to the 2% target. However, significant risks remain that could cause setbacks on the final stretch toward achieving this goal.
US Presidential Election
As the US presidential election approaches on November 5th, we are closely monitoring how market probabilities are evolving over time. Before Biden’s exit, Trump seemed poised for a clear victory. Now, the race has turned into a real contest, and Trump appears to be grappling with how to respond to Kamala Harris.
Meanwhile, current market-implied probabilities suggest that Republicans are likely to win control of the Senate, while Democrats are expected to retain control of the House.
Source: JPMorgan Data as at 3 September 2024
Insights from Jackson Hole, Wyoming
Each year at the end of August, dozens of central bankers, policymakers, academics, and economists from around the world gather for the annual Jackson Hole Economic Symposium.
Given the importance of central banks to economies and investment markets it is useful to pay attention to what they are saying. Here is a summary of what Jerome Powell (US Federal Reserve Chair) had to say this year:
- Inflation has decreased to 2.5% over the past 12 months, and Powell expressed increased confidence that inflation is on a sustainable path toward the 2% target.
- Unemployment is currently at 4.3%, a slight increase, but still low by historical standards. Job vacancies and wage growth have moderated, and further cooling in the labour market is not anticipated.
- Powell noted that with inflation approaching the Fed’s 2% target and the labour market cooling but remaining robust, the Federal Reserve is at a point where policy adjustments can be considered.
So, in summary my take-away is that the Fed is considering rate cuts, but these will be implemented gradually, based on how economic data evolves. The goal will be to keep inflation under control while avoiding excessive weakening of the labour market. We expect the Fed to cut rates for the first time this month.
Berkshire Hathaway Inc Joins Trillion $ Club
In August, the market capitalisation of Warren Buffets’ Berkshire Hathaway crossed $1 Trillion for the first time. It did so after 44 years as can be seen from the graphic below.
Source: Visualcapitalist
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 are already invested in equities but also have cash set aside, waiting for the right time to make additional investments. We’re keeping a close eye on the markets and are prepared to act when setbacks present opportunities to accelerate investments into equities.
For now, holding cash remains comfortable, with returns still well over 3% annually. This allows us to stay flexible while monitoring for favourable market conditions.
These recent fluctuations underscore the importance of having a well-thought-out plan and staying focused on long-term goals. We continue to believe that patience and discipline, alongside a measured approach, are key to successful investing. By working closely with your advisor and maintaining a solid plan, you can navigate these market shifts confidently and take advantage of opportunities as they arise.
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.
