After experiencing a wave of heavy selling in early August, global stock markets managed to rebound by the beginning of September, finishing slightly higher. A combination of factors contributed to the initial market decline, including mixed corporate earnings from major companies, central banks' reluctance to shift towards more accommodative monetary policies, and a weaker-than-expected US jobs report. These developments weighed heavily on market sentiment, triggering a broader sell-off. The decline was exacerbated by technical factors, such as the unwinding of carry trades following an interest rate hike in Japan and reduced liquidity typical of summer trading.
However, by the end of August, stock market indices in the US, UK, and continental Europe had largely recovered, reaching levels near their all-time highs. This swift rebound left some market participants, returning from their summer breaks, puzzled over the volatility earlier in the month. While there were fundamental concerns during August, the speed and scale of the decline appeared to be more related to technical factors than to any significant economic deterioration. Overall, strong corporate earnings, attractive stock valuations, and central banks signaling interest rate cuts helped restore confidence, providing support for both equity and bond markets.
UK and Eurozone stocks outperformed their US counterparts in August, bolstered by favorable currency movements. While the month began with sharp and volatile declines, the markets stabilized as August progressed, gradually recouping losses before turning positive for the month. Although some of the declines were rooted in fundamental issues, the rapid nature of the downturn was primarily driven by technical factors, such as the unwinding of carry trades.
The market's reaction to earnings results from the "Magnificent Seven" tech stocks offered clear evidence that some of the excitement surrounding artificial intelligence (AI) and its impact on major US tech firms has started to wane. This was particularly evident with Nvidia, widely seen as a bellwether for the AI-driven rally. Despite reporting a dramatic doubling of revenue at the end of the month, Nvidia's stock faced an unfavorable market response, even as broader indices approached their highs.
By the time Nvidia released its results, it had already seen its stock rise by roughly 800% over the previous two years, making it one of the most valuable companies in the world, with a market capitalization exceeding $3 trillion. Although Nvidia's shares dipped during the early-August correction, they bounced back strongly during the recovery phase. However, the stock has struggled to surpass its all-time high reached in mid-June, which now serves as a key reference point for market leadership. Since that peak, tech stocks have underperformed, with four of the Magnificent Seven trailing behind broader market indices. In contrast, value stocks have outperformed growth stocks, signaling a potential shift in market leadership. While it's too early to declare a definitive regime change, there are growing signs that such a transition may be underway.
The US jobs report for July showed that 114,000 jobs were added, falling short of expectations and marking the slowest pace of hiring in three months. The unemployment rate rose to 4.3%, which triggered the Sahm Rule, a key indicator suggesting that the economy might be heading towards a recession. This rule is triggered when the three-month average unemployment rate rises by 50 basis points or more above the minimum three-month average of the previous year. However, Claudia Sahm, the economist who devised the rule, expressed skepticism about the likelihood of an imminent recession.
Despite the rise in the unemployment rate, we believe that as long as layoffs remain low, the US economy is unlikely to face a severe downturn. Our view remains that a soft landing is the most probable outcome, but we recognize the importance of monitoring upcoming economic data to confirm or adjust this outlook.
Interest rate markets are currently pricing in 100 basis points of cuts from the US Federal Reserve by the end of the year. With only three policy meetings remaining in 2024, expectations are growing for at least one 50-basis-point cut. While the US economy has been a key driver of global growth throughout the period of monetary tightening, concerns are rising about its relative strength compared to European economies, which have so far avoided prolonged recessions despite previous predictions.
In the UK, attention is shifting to the upcoming Autumn Budget. Although Chancellor Rachel Reeves has repeatedly ruled out increasing the budget deficit, we do not expect significant market impact from fiscal policy changes. Should taxes rise as anticipated, it may create short-term economic headwinds, potentially prompting the Bank of England (BoE) to implement additional rate cuts. Currently, markets are pricing in around 40 basis points of BoE cuts by year-end, with inflation and unemployment dynamics likely to outweigh fiscal changes in importance.
Interest rate differentials between the BoE/European Central Bank (ECB) and the Federal Reserve have driven an increase in the value of both the British pound and the euro against the US dollar. Both GBP/USD and EUR/USD traded near their highest levels of the year in August, buoyed by expectations of US interest rate cuts. Gold also rallied, benefiting from the depreciation of the US dollar and nearing its highest levels of the year.
Brent crude oil prices, meanwhile, returned to near their 2024 lows despite ongoing geopolitical tensions in the Middle East and Russia. Reports suggest that OPEC+ may soon increase oil output, potentially as early as October, as part of a plan to unwind the production cuts implemented to support the market.
Global equities have consolidated during the summer, following a strong performance over the previous 12 months, with the MSCI All-Country World Index up 19.6%. Investors and central bankers are now paying closer attention to employment data amid concerns about slowing economic growth. Economic surprise indices for the US and Eurozone have been negative in recent months, indicating more downside risks than upside potential for economic data. This cautious outlook is reflected in stock performance, with defensive equities outperforming, while weakness in oil and copper prices also signals growth concerns.
However, we continue to believe that a soft landing is the most likely scenario, though we remain vigilant for signs that this outlook may change. Second-quarter corporate earnings were generally strong, with US companies surpassing expectations by around 5%, and European companies also beating forecasts, albeit by a smaller margin. Strong earnings continue to provide fundamental support for stocks, while attractive valuations and central banks either cutting or preparing to cut interest rates bode well for bondholders.