2024 - Q3 market commentary

Markets recover amid central bank rate cuts

Despite some volatility, global markets recovered to reach record highs towards the end of the quarter. The global economy remains resilient and with inflation slowing, central banks have begun cutting rates, helping to boost markets further.

In this update, we’ll reflect on this and take a look at some of the highlights of the quarter – as well as bring our usual funds’ view and outlook from our Investments team.

Global stock market overview

Global markets fell from record highs at the end of July after investors rotated away from large tech stocks. With investors growing more cautious about artificial intelligence (AI), there was some movement away from the tech giants to smaller companies in anticipation of US Federal Reserve (Fed) cuts.

With inflation cooling faster than expected, some investors shifted their money into smaller stocks on the expectation that the Fed could soon cut interest rates. This is because smaller companies tend to do well when rate are low because they typically rely more on borrowing to finance their growth.

While President Joe Biden dropped out of the 2024 presidential election and endorsed Vice President Kamala Harris, this had little overall impact on markets. This was largely because Harris is seen as the continuity candidate.

There was further volatility at the beginning of August over fears of a US recession, rising Japanese interest rates, and falling tech stocks led to a meltdown. The stock market turmoil began after new figures showed rising US unemployment, sparking fears of recession.

Japan’s Nikkei index suffered its worst day since Black Monday in 1987, dropping more than 12% before recovering its losses. The sharp drop in Japanese equities was partly due to the yen's appreciation against the dollar following the Bank of Japan's interest rate hike. US and European indexes also saw huge losses, but markets soon recovered after new US data calmed worries of a possible downturn.

Global markets welcomed the Fed’s decision to cut interest rates towards the end of the quarter, with US stocks soaring to record highs. Chinese stocks also surged after the Chinese government rolled out new stimulus measures to lift its economy.

In anticipation of a change in central banks cutting rates, we have seen a shift in government bond yields on both sides of the Atlantic. 10-year US Treasury bonds dropped below 4% in August for the first time since 2024’s opening week. It was also a similar story for UK government bonds, with yields dipping below 4% in August and staying until the end of the quarter.

Central banks shift their focus

Central banks are now shifting their focus away from controlling inflation to safeguarding economies and fostering growth.

With US inflation falling and the economy cooling, the Fed decided to cut interest rates by half a percentage point in September, for the first time since March 2020. US inflation dipped below 3% for the first time since 2021 in July, with price rises going up by 2.9%, down from 3% in June. There was further good news for consumers when inflation fell to 2.5% in August.

The Bank of England cut interest rates from 5.25% to 5% in August for the first time in four years. The drop in borrowing costs is good news for homeowners and came after inflation held at 2% for a second consecutive month in June. The Bank hit a setback after inflation rose for the first time this year in July. Prices went up by 2.2% in the year to July – slightly above the Bank of England’s 2% target - and remained there in August.

The European Central Bank (ECB) lowered the deposit rate in September by a quarter of a percentage point to 3.50% after inflation fell to 2.2% in August. However, the ECB’s economists expect inflation to pick up towards the end of the year, before falling in 2025 and 2026.

Global economic conditions

After a period of high borrowing costs, solid growth, fading inflation and healthy employment, the US economy appears to be heading towards a soft landing – where the economy slows without a recession. Layoffs remain low, and a rapid rise in the unemployment rate has slowed. Strong US retail sales data has also boosted hopes the US economy will avoid recession.

The UK post-election economic bounce back failed to materialise, with the economy flatlining for the second month in a row during July. The good news is that UK jobs data is looking brighter, with unemployment falling, although pay growth has eased. UK retail sales picked up in July, helped by summer spending on sports equipment.

The Chinese government unveiled measures to boost the country’s ailing economy with new stimulus measures. China's economy continues to be weighed down by the property slump, low consumer spending, and unemployment. Industrial production rose by 4.5% in August compared with a year ago, down from July’s 5.1% growth. Investment in real estate has fallen, despite attempts by the government to revive the sector. Retail sales growth is also slowing, while youth unemployment has risen above 17%.

The euro area economy saw a 0.3% increase in the second quarter, matching the growth rate from the first quarter. Despite this steady overall performance, Germany’s industrial sector continues to struggle. Wage growth – closely monitored by the ECB – slowed during the second quarter, easing fears labour costs could spark an inflation rise. On the employment front, the labour market remains strong, with the unemployment rate slightly declining to 6.4% in July, down from 6.5% in June.

What this means for Wesleyan

Our funds view and outlook

With central banks now having entered a rate-cutting cycle in August and September - following the fall in inflation globally to more acceptable levels - there is some comfort to be had for bond markets. In particular, the US going ‘big’ with its first rate cut in four years – knocking 50 basis points off its interest rates at the Federal Reserve’s September meeting. Lower global interest rates should be the ‘good news’ that fixed income investors worldwide are looking for (including those invested in our lower risk funds).

Equity markets generally made further marginal progress in the quarter, continuing to build on the stronger gains made earlier in the year – benefitting our funds which have a heavier weighting in global shares.

It was pleasing to see UK equities continuing their steady resurgence - something we had predicted would happen in earlier updates, and a reason we’ve been holding onto more of our UK equities. Whilst we can’t ignore those high-performing US tech stocks, which remain a headwind for us, it was pleasing to see returns in September starting to broaden out into other investment markets.

There was some brief turbulence in global markets in early August, over fears of slowing US economic growth (as mentioned earlier) which resulted in sharp falls (albeit temporarily) in global stock markets worldwide. Looking forward, we are mindful that further volatility could be just around the corner in various forms: Notably the US elections in November; and the changing geopolitical landscape, such as the worsening situation in the Middle East, and the ongoing war in Ukraine.

During the quarter, we continued with our commitment to look for opportunities to grow our commercial property portfolio. An environmental highlight for us has been the partnership with Be.EV - one of the fastest growing EV charge-point operators in the UK.

Our first venture with them will see them build a 16-bay ultra-rapid EV charging hub at a retail site we own in Wednesbury. Anticipated to be completed over the winter months, the partnership is part of our commitment to include environmental, social and governance (ESG) factors into our portfolio (in line with our Sustainable Investing Policy).

Once fully operational, the hub will no doubt benefit the thousands of electric car drivers using the busy M6 motorway each week, along with shoppers at the site. We’re incredibly proud to be playing our part in supporting the electric car movement in the UK.

We remain optimistic (along with other investors) that there are more rate cuts to come before the year is out, notably from the Bank of England, the US Federal Reserve and the European Central Bank. If inflation remains at more acceptable levels, and interest rate cuts continue, then we are likely to see a further improvement in bond market returns going forward.

We continue to look for opportunities in overseas equities to further enhance our fund returns, whilst acknowledging that shares have performed well so far this year. Our strategy of maintaining a good diverse mix of investments going forward will also help us to ride out any future market turbulence.