Market commentary: 1st July to 30th September 2024
Having signalled forthcoming rate cuts for nearly two years, and failing to deliver, the Fed finally got “on message” and cut base rates by 0.5% (50bps) in September. The size of the rate cut was modestly more than the majority of expectations, though about 30% of forecasters predicted a 1.5% (150bps) cut, which would have been startling. The most noticeable element is that the cut was substantially later than expected.
The market’s reaction to the surprise was as muted as it had been to the delay – markets have been pretty serene. Stock markets are up for the year and unchanged on this news. The yield curve (the different yields achieved over time by gilts or treasuries with gradually longer durations) is mostly unchanged.
This serenity is interesting. It is highly reminiscent of the investors’ adage about what is learned after a market crash “in the short term – a lot, in the medium term – not much, in the long term – nothing”. Markets appear to have forgotten how terribly the Fed misjudged the inflationary pressure it contributed to in 2020 and 2021. The data the Fed relies on is backward facing and has proved to be a lagging indicator. The risk now is that it has misread emerging signs of a slowing economy and is cutting rates too little too late. Amongst the economic noise some patterns are emerging – apartment building starts are down by 40%, credit card borrowing has been sharply higher, even McDonalds is seeing revenue declines.
However, it is a fair retort to say that 2023 looked like the year of slowdown with interest rates rising from the floor. However, fiscal policy, the reversal of excess savings and money supply helped the US consumer to overcome these headwinds and drive growth forwards. These forces are abating and a slowdown in US growth is increasingly obvious. We would venture that the Fed is between 6 and 12 months late in its response to this data. Quicker than it was to recognise inflation, but behind the data again.
Investors are sensitised to elections to a higher degree than is supported by history. The outcome of elections is usually influential only to a small degree and for a limited period of time – you can get a reaction but it is usually small and dissolves rapidly. The outcome of policy decisions can be far more influential but these play out over many years. Even when there are shock outcomes, Brexit being a good example, the wobble that affected the UK stockmarket and £/€ eased its way back within weeks.
The US election looks to be close, again. Biden was unelectable after his dire performance in the debate with Trump in late June. His resignation in favour of Kamala Harris swung the dial back in Democrats’ favour. The assassination attempt on Donald Trump put him back in the lead. Harris’s strong performance in the second debate (and the respective choices of vice-Presidents) has found the needle twitching in the middle. It may be that we look back on the Brexit 52% v 48% vote with a fondness for its decisiveness.
There is unlikely to be an investable outcome from either victory: that is an investor will find it difficult to make money taking a position on either candidate, because on too many policy issues, there is insufficient difference. Neither appears remotely attracted to the quaint notion of balanced budgets. Trump is forceful on his vision for “America first” and its consequences on trade and tariffs. But his language has not changed from his term in office and the Biden administration, for all of their vocal disagreement, did nothing to roll back his policies. The bombast may be loud but the actual policy divergence is much quieter.
In the UK, the Conservative government received a chastising kicking, and Labour secured a loveless victory. Similarly to the US, the divergence in policy terms was much lower than the rhetoric suggested. The impact on UK markets was not noticeable. Where investors are rightly focused is not on gross returns from investing, but on net. Tax is the concern in the UK. The Labour government in its manifesto said that it would not increase income or corporation tax, but what was noticeable in its absence was any reference to capital gains tax (CGT); the implications are obvious.
The big accountants have calculated that any level above 30% for CGT would have a negative yield (ie: HMRC tax receipts would diminish as people undertake more avoidance, or simply refuse to sell/crystallise capital gains). However, as with VAT on public school fees, these things are done for primarily ideological reasons, so tax maximisation may be a secondary consideration. One under-discussed possibility is that because some investors have been pulling forward disposals, out of fear of a big increase in CGT, tax receipts are artificially high at present. It may be that the fear of higher CGT has done what the government desired and the actual future CGT rate will be less punitive than feared.
If you add the second anniversary of the Russian invasion of Ukraine to the first anniversary of the Hamas attacks, then it must be that geopolitical risks remain elevated. Lower interest rates usually are positive for investments but the slowing economy that is causing them is a negative. The magnificent seven have been stumbling of late and most noticeably, there have been earthquakes beneath the legal support for these monopolies – we will be publishing a longer note on this phenomenon in the coming weeks.
Overall, it is not obvious what the positive drivers of stock markets and risk assets will be in the coming months. Keats described Autumn as the season of “mists and mellow fruitfulness”. It appears darker skies than he envisaged are on the horizon.