August 2024 Update

After a relatively calm year in equity markets, early August brought a sharp sell-off. The drop was triggered by weaker-than-expected economic data from the U.S. and Japan’s first interest rate hike in decades. Major indices reacted significantly: the S&P 500 fell by around 10%, the Nasdaq dropped 15% from its July highs, and Japan’s Nikkei tumbled over 20%. The popular “carry trade,” where investors borrow in low-interest currencies like the Japanese Yen, was also impacted by these changes.

Interestingly, mid-July marked the start of a rotation out of big tech stocks such as Meta (Facebook) and Alphabet (Google), with investors taking profits on these high performers. As a result, funds flowed into more traditional industrial and cyclical sectors. However, as August progressed and U.S. economic data weakened, money began moving out of equities and into bonds, leading to a rally in bond prices and falling yields.

Market Stabilisation and Future Outlook

Since the sell-off early in August, markets have stabilised and even moved higher. Investors are now optimistic that the U.S. will avoid a recession, supported by expectations that the Federal Reserve will begin cutting interest rates in September due to a slowing economy and rising unemployment.

In contrast, Australia faces a more challenging economic landscape. Inflation remains stubbornly high, and while this could justify higher interest rates, the economy is weaker than in the U.S. The Reserve Bank of Australia (RBA) seems inclined to keep rates on hold, aiming to curb inflation without exacerbating unemployment.

The market bounce since early August has left equity valuations somewhat elevated. However, the potential for lower interest rates in the future and strong company earnings could continue to support share prices. For investors, another period of market weakness could present a good entry point into equities.

Globally, we are witnessing significant changes, with geopolitical tensions and shifts in governments as voters express their dissatisfaction. While these factors create short-term market fluctuations, central bank policies and economic data remain the primary influences on market trends. The upcoming U.S. election may cause some volatility, but long-term economic fundamentals will likely play a more crucial role.

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SCM Financial Group Investment Committee