August – October 2024

Returns for a Sterling investor over the last three months for a selection of indices are below:

Bouts of volatility have been a recurring theme throughout the past three months. The most notable came at the start of August when US unemployment unexpectedly rose to 4.3%, sparking fears of underlying economic fragility with the Bank of Japan simultaneously (but coincidentally) surprising markets by increasing their interest rate to 0.25%. This inadvertent perfect storm led to a sharp rally of the Yen, and over the course of a few hours, institutional investors unwound ‘carry trades’, negatively impacting Japanese markets significantly. The Nikkei 225 ultimately fell -12.40% on 5th August. Whereas there were immediate market fears that this might indicate an impending crash, the Nikkei swiftly went on to recover strongly and by month end, the index had only fallen by -1.16%, and the S&P 500 rallied +2.30%.

In September, the People’s Bank of China (PBC) unleashed a huge stimulus package to ease their housing crisis and assuage China’s recent economic malaise. Alongside a raft of measures, including cutting the reserve ratio requirement (the amount of reserves lenders must hold) by 50bps, a move which freed up around 1 trillion yuan ($142bn) for new lending, the PBC also announced plans to relax borrowing restrictions for investing in shares on Chinese exchanges. Initially, the stock market reaction was positive – with the Chinese CSI 300 Index rising +32.47% from close on 23rd September through to 8th October – however an underwhelming secondary stimulus announcement caused some retracement as investors and analysts generally accepted that more direct stimulus would be needed to truly effect the fortunes of the world’s 2nd biggest economy. The CSI 300 subsequently fell -8.58% through to the end of the period.

With the European Central Bank having already implemented their first rate cut of the cycle, the Bank of England followed suit on 1st August, reducing from 5.25% to 5.0% and importantly noted that they expect indicators of inflation expectations, and headline inflation itself, to normalise. Indeed, headline CPI inflation over the period came in at 2.2%, 2.2%, and 1.7% – though it is expected to nudge up slightly in the coming months as the drop in energy prices 12 months previously drops out of the calculation. The US Federal Reserve on 18th September chose also to lower their lending rate, the first cut they have announced since March 2020, surprising markets with a 50bps reduction to 5% (markets had expected 25bps) as well as indicating that more cuts may be implemented this year.

At a company level, the third-quarter earnings season began in the US during October, and results so far have generally been strong. Major banking stocks have led the way with JP Morgan Chase, the first to report on 11th October, beating estimates across the board with revenue of $43.32bn (vs $41.63bn expected) and earnings per share (EPS) at $4.37 (vs $4.01 expected) – with its shares rallying +4.44% on the day. It was a similar story for Goldman Sachs, which also exceeded revenue and EPS expectations, as their investment banking revenue jumped 20% due to increased debt and equity underwriting and heightened mergers and acquisitions activity. Earnings season for technology stocks was a more nuanced story since whilst Amazon, Meta, Apple, Alphabet, and Microsoft all beat their earnings estimates, Microsoft endured its worst trading day in over two years (-6.05%) as investors were disappointed by revised future earnings guidance mentioned in their earnings call – a sign that some company share prices already account for sustained strong earnings momentum over the years ahead.