October monthly investment update – Reflections on September 2024

In this update, Wesleyan’s Director of Investments, Martin Lawrence digs deeper into the belief that September can often be a ‘difficult’ month for investors, and when and where we might see further interest rates cuts globally before year end.

In September, the familiar term of ‘back to school’ for the majority, signals the end of summer, a new school year, and for parents, and guardians, worldwide, it no doubt brings a sense of ‘getting back to normality’.

It is that sense of ‘getting back to normality’ that can sometimes coincide with poor outcomes for stock market investors. Global traders at this time of year, return to their desks, following long summer holiday breaks - maybe with a view to adjusting their portfolios, and bringing with them new or renewed economic concerns that could send a ‘seasonal’ chill through investment markets.

The ‘September’ effect 

Historically, we know that the month of September has proven to be ‘troublesome’ for stock markets. Events such as: Black Wednesday in 1992 – which saw the UK Government suspend Britain’s membership of the European Exchange Rate Mechanism - due to a failing pound; the collapse of banking giant Northern Rock in 2007; and, more recently, the UK’s mini-budget debacle of 2022, which all but derailed bond markets.

However, we should keep in mind that every year is different and there really is no ‘rule of thumb’ that dictates where markets are going to go next. Each year brings its own influences: different stocks, economic backdrops, and changing political and geopolitical landscapes.

September 2024, as a whole, was much more subdued, with UK government bonds returning precisely zero and global equities only producing very marginal gains during the month. In retrospect, it was August that appeared ‘more troublesome’, and we actually had bigger stock market falls at the start of the month – most likely amplified by quieter trading desks during those summer vacations (mentioned earlier).

But the stats for September do mask some spectacular moves if we dig into the detail. Nvidia (the US chipmaker) has seen its shares meteorically rise so far this year, joining a select group of global companies that were worth more than $3 trillion. However, at the start of September, Nvidia’s shares fell 9.5%. As investors, we know that shares rise and fall all the time, but it's rare for the shares of a company of that size to fall by that magnitude.

At the other end of the spectrum (and at the end of September), we witnessed a big jump in Chinese shares (including an astonishing 8% jump on the very last day of the month) as the Chinese government announced various measures to try and kick-start their economy. This is something we’ve reported on previously, and we even flagged the (admittedly longer-term) potential for Chinese shares back in our January update.

Global news - interest rate cuts and inflation

We also indicated in our update last month that a US interest rate cut was being flagged. While some investors had correctly predicted the cut of 0.50% that the Federal Reserve (the Fed) delivered at their September meeting (rather than just 0.25%), few were prepared for the conviction behind it. We certainly felt it was quite an aggressive move and has led us (along with other investors) to debate what they will do next in their remaining scheduled meetings this year.

We think the US job market holds the key to future US decisions such as this - not least because the Fed actually has a ‘dual mandate': It has the (arguably) enviable privilege of promoting both stable prices (i.e. to keep inflation under control) and maximising employment. This is very different to most other countries (including the UK, where the Bank of England (BofE) has one mandate only: to keep inflation at its 2% target (set by the Government)).

With the US job market continuing to gently soften (according to August figures, at least) the next data releases (due to be announced in October) will be key determinants of whether the Fed feels the need to implement further half-point cuts to rates before the year is out.

The US was not alone in cutting rates during September. Both Canada and the European Central Bank made 0.25% cuts to their headline interest rates in the month. Here in the UK, the BofE left rates at 5%, with only one of their nine Monetary Policy Committee (MPC) members voting for a cut. This came as no surprise, particularly as the cut in August had been described by many as "finely balanced". The Bank’s governor, Andrew Bailey, said at the time it was “vital” that inflation remained low.

During the month, the BofE also continued to remain nervous about high wage growth (and the impact wages could have on future inflation). However, underlying wage growth fell closer to 5% (for the period to August) which did at least offer some comfort.

UK inflation (the headline measure which includes electricity, petrol and fruit & veg, etc) remained at 2.2% for August (just ahead of the 2% target). However, the underlying (or ‘core’) measure of inflation (which excludes the more volatile items) rose slightly to 3.3% - and could be another reason why the MPC has delayed further interest rate cuts.

We had previously explained the potential for UK inflation to rise again towards the end of 2024. This is now starting to become a reality following the announcement of the new energy price cap rise (by energy regulator, Ofgem) in October. We still expect UK interest rate cuts to come though, probably at the next meeting of the MPC in November. This is partly because the UK economy saw no growth in June or July, with estimates for growth in the second quarter of 2024, being pared back to 0.5%.

Over in Europe, weakening economies in France and Germany also make further interest rate cuts from the European Central Bank (ECB) more likely too - the next Governing Council of the ECB will take place in October.

Inflation globally looks to have been tamed for now, and falls in the oil price since April should help to keep it under control. However, the recent ground invasion in Lebanon by Israel, and Iranian strikes on Israeli soil, have temporarily pushed up the price of oil which, if sustained, could force the current global inflation situation into reverse.

Our trading activity in recent times has been more focused on buying shorter-dated corporate bonds to balance out the longer-dated government bonds that we have previously purchased as part of our long-term investment strategy. We are also continuing to acquire more commercial property as the market looks to be stabilising. Bonds (corporate and government) and commercial property assets will all benefit from lower future interest rates.