Jones & Co Quarterly Market Review and Outlook – July 2024
FE Investments delivers its view on the current state of the economy with expert commentary on our in-house portfolios, plus a bonus Market Note on the UK election result.
Key Summary:
- Many equity markets produced further gains, although the weak yen and political instability in France dragged the performance of Japanese and European equities.
- Investor enthusiasm for artificial intelligence helped US equities rise as US tech stocks produced the biggest gains once again.
- Bond markets remain changeable. The improving outlook for inflation and a rate cut by the European Central Bank was offset by caution among many other central banks and robust US economic growth.
- The outlook for equity markets continues to improve, while a lack of clarity on the direction of interest rates remains an issue for bond markets.
Global Markets Continue to Rise as Inflation Eases
The July 2024 market outlook shows a broadly positive picture for global equities, supported by easing inflation and resilient economic growth in key regions. Equity markets continued to deliver gains, although performance varied by geography due to currency movements and political uncertainty.
Investor confidence was strongest in the United States, where enthusiasm around artificial intelligence continued to drive equity performance. In contrast, Japanese and European equities faced headwinds from currency weakness and political developments, particularly in France.
Bond markets remained volatile, reflecting ongoing uncertainty around the future direction of interest rates despite early signs of easing inflation.
Equity Markets Driven by US Growth and Technology
Global equity markets maintained momentum during the period, largely driven by the strength of the US economy. A high proportion of companies in the S&P 500 exceeded earnings expectations during the second quarter, supported by continued consumer demand and economic resilience.
The dominant theme in US equity markets was artificial intelligence. Major technology companies including Nvidia, Alphabet, Meta and Microsoft delivered substantial gains as investor enthusiasm for AI-related innovation remained strong. Apple and several smaller semiconductor companies also benefited from this trend, reinforcing the concentration of returns within US technology stocks.
UK Equities Benefit From Falling Inflation
UK equities performed well, helped by a steady decline in inflation and modest economic growth. These conditions increased expectations that the Bank of England may move towards interest rate cuts in the coming months.
Additional support for UK markets came from rising commodity prices and increased merger and acquisition activity. Takeover bids for several UK-listed companies lifted share prices and improved overall market sentiment, despite consumers remaining cautious.
Emerging Markets Supported by India
Emerging market equities saw renewed interest, with India leading performance. Investors have been attracted by India’s strong economic outlook, robust domestic demand and favourable long-term growth prospects.
China presented a more mixed picture. Economic data was uneven, but improvements in consumer spending and manufacturing activity helped lift Chinese equity markets during the period. Overall, emerging markets offered attractive diversification opportunities, particularly against the backdrop of heavy concentration in US equities.
Political Uncertainty Weighs on Europe and Japan
European equities initially performed well but lost momentum following the European Parliament elections. Gains made earlier in the period were erased after far-right parties performed strongly, prompting political uncertainty across the region.
The impact was most pronounced in France after President Emmanuel Macron called a snap general election. This decision unsettled investors, leading to a sell-off in French equities and broader weakness across European markets. Banking stocks were particularly affected, while large multinational companies provided some defensive stability.
Japanese equities also fell during the period, compounded by continued weakness in the yen against sterling. Japan’s low interest rate environment has kept downward pressure on the currency, creating challenges for investors holding sterling-based portfolios.
Bond Markets Remain Volatile
Bond markets continued to experience fluctuations as investors balanced falling inflation against cautious central bank messaging. While inflation trends have improved, concerns remain that cutting rates too early could reignite price pressures.
During the quarter, the European Central Bank reduced its main interest rate from 4.5 percent to 4.25 percent. The Bank of Canada and the Swiss National Bank also implemented rate cuts, providing some relief to bond markets.
In the UK and US, weaker economic data towards the end of the quarter supported government and corporate bond prices. However, investor sentiment shifted frequently as hopes of rate cuts were repeatedly tempered by central bank caution.
Inflation Trends Show Gradual Improvement
Inflation has resumed a downward path, offering cautious optimism for markets. In the UK, CPI returned to the 2 percent target in May as lower food prices offset rising service costs. This marked a significant milestone after a prolonged period of elevated inflation.
Eurozone inflation proved more persistent, hovering around 2.5 percent. Despite this, falling inflation rates in France, Germany and Italy suggest price pressures are beginning to ease across the region.
In the United States, inflation remained stubbornly high earlier in the year, reflecting strong consumer demand. Headline CPI rose from 3.1 percent in January to 3.5 percent in March but has since begun to fall as food and housing costs increase more slowly.
Central Banks Move Carefully on Interest Rates
Improving inflation data has allowed some central banks to begin cutting rates, but policy remains cautious. Bond market volatility reflects ongoing uncertainty over the timing and scale of future reductions.
Many central banks remain concerned that loosening policy too quickly could trigger renewed inflation. As a result, markets continue to react sharply to each new data release, with sentiment shifting between optimism and caution.
European Elections Increase Market Volatility
Politics played a more significant role in financial markets than expected this quarter. While the UK general election campaign progressed with relatively limited market disruption, developments in France had a more pronounced effect.
The strong performance of the Rassemblement National party in the European elections prompted President Macron to call a snap election. This decision led to sharp declines in French equities and government bonds, with investors concerned about the potential composition of the National Assembly.
Yields on French government bonds rose sharply, reflecting increased perceived risk, while broader European markets were dragged lower as uncertainty spread.
Market Outlook for the Remainder of 2024
The outlook for equity markets continues to improve, supported by easing inflation and resilient earnings. However, uncertainty around interest rate policy remains a key challenge, particularly for bond markets.
In the United States, signs that economic growth is cooling slightly increase the likelihood of rate cuts, although wage inflation remains elevated. Similar patterns are emerging in other developed economies, where inflation is falling but remains sensitive to labour market pressures.
Japan continues to face uncertainty, with its central bank unconvinced that inflation has stabilised at target levels. The weak yen is likely to remain under pressure until US interest rates begin to fall.
The UK outlook is improving as economic growth returns and corporate earnings hold up, despite consumer sentiment remaining fragile. In Europe, political uncertainty remains a risk, but falling inflation and potential further ECB rate cuts offer support.
Emerging markets appear well positioned, with India and parts of Latin America offering attractive growth prospects. Any interest rate cuts by the US Federal Reserve would likely provide further support to these markets.
What This Means for Investors
Diversification remains crucial in the current environment. While US equities have delivered strong returns, concentration risk continues to grow. Emerging markets and selective exposure to Europe may provide balance as conditions evolve.
Bond markets require careful positioning given ongoing rate uncertainty. Active management and regular portfolio reviews are essential to navigate changing market dynamics.
Long-term investors should focus on fundamentals rather than short-term volatility, ensuring portfolios remain aligned with financial goals and risk tolerance.
Speak to an Adviser About Your Investment Strategy
If you want to understand how current market conditions could affect your investments, professional financial advice can provide clarity and reassurance.
Discuss your portfolio, risk exposure and long-term objectives with a trusted adviser to ensure your strategy remains resilient, diversified and aligned with your future plans.
Click here to read the full Jones & Co Quarterly Market Review and Outlook – July 2024
Click here to read the full Market Note on UK elections – An Unsurprising Result – 5 July 2024
If you are interested in discussing professional portfolio management, then contact our team today on 01246 550521 or advice@ifajonesandco.uk
