July 2024 saw a market dip—learn what caused it and how the upcoming Fed rate cuts could offer new opportunities for investors globally and locally. Chief Investment Officer at EasyRetire RISE, Duane Gilbert, remains optimistic for 2024, noting that falling inflation and upcoming rate cuts could support equity markets.
Global Markets
July was a very interesting month in global markets. For context, global markets have rallied since October 2023 without experiencing a significant pullback or correction. Markets did experience a small correction in April 2024, but it was short lived. In July 2024 we saw a more significant market pullback.
Equities fell roughly over 8% peak to trough (16 July 2024 to 7 August 2024) before recovering in August 2024. Global Equities were still up for the calendar month of July as the correction happened towards the end of July. Developed market equities ended the month up 1.8% in USD, with US equities up 1.2 % and European equities up 2.2%. Emerging market equities ended the month up 0.4%.
Chart 1: Global Equities Performance (Source: Infront)
The reason behind the market correction in July was a weaker-than-anticipated jobs US jobs report, which showed that 114k jobs were added compared to 180k forecasted, while the unemployment rate increased from 4.1% to 4.3%. However, this is only half the story. We also saw something approximating a “short squeeze” of a popular currency trade which exasperated the sell-off. A traditional short squeeze happens when the price of an asset rises sharply, causing traders who had sold short to close their positions. The increased selling pressure then causes the share price to go up further. For much of 2024 traders were borrowing at low interest rates in Japan and investing at high interest rates in the US. This trade benefitted further from a strengthening dollar and depreciating Yen. When the US jobs report missed forecasts, the expectation for US interest rates cuts were brought forward, causing the dollar to fall. This forced traders to unwind their leveraged JPY-USD trade aggressively, exasperating the sell of in both US and Japanese markets.
Chart 2: JPY-USD (Source: Infront)
Markets are now expecting the Fed to begin cutting rates in September 2024. The US 10-year bond yield fell from 4.4% to 3.9% in July.
Chart 3: US 10-year bond yield (Source: Trading Economics)
Since March we have not seen pro-cyclical assets such as industrial metals and emerging markets ex China rally, suggesting that the rally in developed market equities is driven by expectations for rate cuts rather than an improving growth outlook – which is concerning. In fact, there is cause for concern for US growth (and hence global growth given the central role that the US plays in global trade). The US unemployment rate is picking up sharply, while unit labour costs are declining, which is a typical precursor to a recession.
Chart 4: US unemployment rate and recessions (Source: Trading Economics)
A key event in June was US President Joe Biden dropping out of the 2024 presidential race and being replaced by Vice President Kamala Harris. Kamala Harris does not poll well, and it looks like the US presidency is now Donald Trump’s to lose. This is market positive. In his previous term he introduced large tax reforms, renegotiated trade policies that were not fair and reciprocal - taking a very firm stance against China, and he was able to eliminate several bills that made it difficult for small American businesses to do business. This time, we expect the Trump rally to be more aggressive, since markets know what to expect from him. Markets do not like uncertainty, and regardless of which candidate wins, markets will probably breathe a sigh of relief after the election is done.
LOCAL MARKETS
Local markets had another good month as domestic stocks benefitted from positive sentiment towards the Government of National Unity (GNU) and a weaker dollar i.e. stronger rand. The Financials 15 Index ended the month up 5.1% (now up 20% over the last 3 months), while the Industrial 25 Index and the Resource 10 Index, which hold companies that make more of their earnings offshore, ended the month up 1.7% and down 5.7% respectively.
The JSE All Bond Composite gained a massive 4.0% for the month as sentiment toward South Africa’s fiscal position improved. Inflation linked bonds gained 1.8%. The prospect for sustained dollar weakness on the back of interest rate cuts could drive the South African equities and bonds, as well as the rand, for months to come. While it is pleasing to see this change in sentiment, the reality is that Government expenditure continues to expand aggressively. Government expenditure has almost doubled in the past 8 years, with interest expenditure increasing from roughly 9% to 18% as a percentage of revenue over the same period.
Chart 4: National Government Expenses (Source: Stats SA)
Chart 4: South Africa Public Debt and Debt Service Costs (Source Alpine Macro)
Chief Investment Officer, Duane Gilbert’s Commentary
Our market outlook for 2024 remains bullish. Falling inflation will give the Federal Reserve scope to cut interest rates, which will be supportive of equity markets (and bond markets to a lesser degree). However, we should not forget that the recent interest rate hiking cycle was the most aggressive in 40 years, at a time where growth was already fragile. It is likely that the US will experience a mild recession towards the end of the year, or early 2025. However, we do not expect this to meaningfully set back US markets given that the Fed is will likely start cutting rates ahead in September. A recession is also likely in Europe, and China seems likely to continue its low growth trajectory in the absence of a meaningful stimulus package from the government.
As a result, we remain conservatively positioned in our portfolios, but with a tactical overweight to defensive US equities. We have rotated our allocation to global bonds into equities during the equity sell-off in July/August 2024. South African equities are particularly cheap but vulnerable to a global sell-off. One needs to carefully pick companies that can grow their earnings in a low growth environment. Given the continuing decline in investor sentiment towards South Africa, we maintain a low exposure to South African government bonds. We prefer exposure to high-quality secured credit. We also hold a lot of cash in our portfolios. We prefer USD over ZAR. We believe the current rand strength will be short-lived and that, in the absence of a commodity super-cycle, the ZAR will continue to drift weaker in the medium to long term. Our large cash position gives us the dry powder we need to take advantage of bargains that may arise from a market sell-off.
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