Markets soar on summer rate cut optimism
It’s been a strong quarter for stock markets, with hopes of summer interest rate cuts taking them to new highs. A resilient global economy and a solid earnings season – especially from the Magnificent Seven tech stocks – have also helped boost equities.
In this update, we reflect on these events and explore some of the highlights and the lowlights of the quarter – as well as bring our usual funds’ view and outlook from our investment team.
Global stock market overview
After a hesitant start to the year, markets regained momentum swiftly, buoyed by technology stocks and increasing optimism regarding the US economy. US stocks soared at the beginning of the quarter, powered by the boom in artificial intelligence (AI). January’s tech rally carried through to February and March, driving up developed market equities.
Markets rallied to record highs in March, driven by growing hopes that central banks will start cutting interest rates in the summer. Stocks soared after US Federal Reserve (Fed) officials reassured investors about the prospects for rate cuts this year.
It was a similar story in the UK, with the FTSE 100 surging to a near-record high amid the global rally. After last year’s volatility, UK government bond yields have now settled, but are still higher than they have been in recent years. European stocks also surged, driven by strong earnings across the continent and hopes of imminent rate cuts by the European Central Bank (ECB).
Japan’s Nikkei share price index broke its 1989 record and surged to a new high following decades of stagnation in March. The corporate sector is seeing record profits, the yen is strengthening and exports are booming after bouncing back from the pandemic.
China’s markets have been struggling in the face of a slowing economy, worsening disinflation and property market turmoil. Chinese authorities are ramping up stimulus once again to boost market confidence, but it remains to be seen whether this will be enough to reverse the slump.
Price growth remains stubborn
While inflation has eased over the past year, it remains stubbornly high, leaving central banks wary of cutting interest rates too soon.
UK inflation unexpectedly remained at 4% in January, but then fell to almost its lowest level in two and a half years at 3.4% in February as price rises for food and eating out slowed sharply. Despite the fall, the Bank of England held interest rates at 5.25% for a fifth consecutive time in March, but said the prospects for a cut are now “moving in the right direction”.
US inflation unexpectedly edged up to 3.2% in February, keeping the US Federal Reserve (Fed) on course to wait until the summer before it starts to lower interest rates. The Fed announced it was leaving interest rates at a 23-year high of 5.25% to 5.5% at its March meeting as it continues to assess the impact of cooling inflation on the economy.
The US central bank said it intends to keep interest rates at the current level until it has more confidence that inflation is on track toward its official 2% target. While inflation has eased more slowly this year, Fed officials have signalled that they still expect to cut their key interest rate three times in 2024.
With inflation slowing in the euro area to 2.4%, the ECB has also suggested interest rate cuts will soon be on the way. Now that central banks have inflation under control, June is looking the likely start date for global rate cutting cycle.
US economy continues to shine
While some major economies have been teetering on the edge of recession, the US economy continues to defy predictions of a major slowdown. US growth slowed far less than expected towards the end of 2023. Jobs growth remains strong and unemployment is close to record lows, boosting hopes of a soft landing.
Despite the UK entering a recession in the second half of last year, there are glimmers of hope. The UK economy returned to growth at the start of the year, while consumer and business sentiment have been more upbeat and house prices are rising.
The euro area economy avoided a technical recession at the end of last year, held back by shrinking German output and stalled French growth. Economists are now expecting the pace of growth across the region to pick up as inflation eases and wage growth boosts spending power.
What this means for Wesleyan: our funds view and outlook
Whilst bond markets dipped slightly, many of the world’s leading stock markets, such as the US, Europe, and Japan, reached record highs during the quarter (as mentioned earlier). The majority of our funds were in positive territory at this time. Good news overall for those investors whose resolve has stayed strong in particularly turbulent times.
Whilst the UK’s FTSE 100 index is not yet back to an ‘all-time’ high, it has risen steadily (by more than 8%) since October 2023 – helped by the fact that the economy started growing again in January (according to the latest official data).
Optimism has perhaps improved, thanks to the expectation that the Bank of England (BofE) is now in a position to be able to cut rates soon. However, we are unlikely to see this happen at the next meeting in May, with early summer looking more probable. Nevertheless, this will hopefully offer some reassurance for those invested in our lower to moderate risk funds that traditionally have a higher weighting in bonds. A cut in interest rates does come with a caveat: the BofE will need convincing that inflation will remain under control – regardless, it is encouraging to see it fall in February (as mentioned earlier).
We continue to diversify our portfolios into overseas markets, and we are making steady progress. Casting our net even wider, we are looking at global investment opportunities – from the US (because it’s the biggest stock market in the world) to China (now looking more attractive post its 2023 slowdown). Japan is another country we monitor, particularly as March saw an end to the country’s era of prolonged negative interest rates.
Our Commercial Property Portfolio continues to expand – with acquisitions of two new car dealerships purchased in the first quarter – as we look to increase the property weighting within our flagship With Profits Fund. Further acquisitions can be expected in the months ahead. In the meantime, the portfolio continues to generate a steady stream of rental income.