Monthly House View - August-September 2024 - Download here 

As we enter summer and are halfway through 2024, this is a good time to reflect on the first half of the year’s market evolution and the opportunities ahead.

The global economy continues to show positive trends, spurred by falling inflation, rate cuts in several countries and technological advancements. The US economy remains strong, prompting us to double our GDP forecast to 2.5% since the start of the year, driven by the resilience of the US consumer. While some areas like the savings rate, real income and manufacturing are slowing down, we view this as a normal course of events rather than a sign of significant economic slowdown. Pessimists might point to this as an imminent warning of a considerable economic downturn, but optimists like us see this as a natural normalisation.

CUTS ARE IN THE AIR

One of the most notable developments has been the significant decline in US inflation. Initially, three disappointing inflation reports early in the year shifted expectations for rate cuts from the Fed from seven cuts to almost none. However, the Federal Reserve (Fed) Chair Jerome Powell stood firm, and in June, inflation cooled to its slowest pace since 2021, notably due to a long-awaited slowdown in housing costs. The road is now open to a rate cut by the Fed in September, we expect two cuts this year. This development comes at a crucial time as unemployment has risen for three consecutive months. While this is not alarming, maintaining high short-term rates for too long is not ideal. The Fed needed this disinflation to continue to maintain its credibility, a central theme of our macroeconomic scenario on which we held firm.

EQUITIES VERSUS BONDS: MAKE YOUR BETS

In terms of financial market performance, it has been a tale of two stories. Bonds have seen significant movement: US 10-year yields rose to nearly 4.75% from 3.8% at the start of the year, then receded to around 4.2% after the June Consumer Price Index (CPI) report. Opinions are divided: the CEO of one the largest US bank foresees long-term yields at 7% while their own market strategists see them at 3%. Record deficit on the one hand (USD 35 trillion (source: www.usdebtclock.org)), slowing economy on the other hand: this is not an election, but placing your vote on the right scenario will be key. We are currently tactically long duration in the medium part of the curve but believe the curve needs to normalise, with lower short-term rates and higher long-term rates, a “disinversion” process. Conversely, equities are the asset of choice. The theme of US dominance in our global outlook for 2024 continues, marked by record low equity volatility, notably when compared with bonds. Indeed, the volatility of the S&P 500 fell to below 6% in June. To put things in perspective, this means daily movements below 0.35%.

ROTATION

As we look forward to the second half of the year, we remain optimistic and prepared. For equities, 60% of US market performance has come from just five stocks. Concentration or dominance? We see two possible scenarios ahead: 1) continued advancements in technology and artificial intelligence (AI) pushing Mega Tera caps1 to new highs; 2) a broader performance spread across other market sectors, smaller market caps or emerging markets, where we see significant catch-up potential. As an illustration, July saw a session where the outperformance of the Russell Index (small caps) versus the S&P 500 (large caps) was among the top five in the last 45 years. In this edition, Lucas Meric provides an in-depth analysis of the US labour market. With the disinflation process well underway, the current employment slowdown seems to us more like back to normal than a sharp change. This trend will now be a key focus for the Fed to sustain the current soft landing scenario.

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