September investment update – Reflections on August 2024

In this update, Wesleyan’s Director of Investments, Martin Lawrence, reveals why data coming out of the US in August caused global markets to tumble, and how currently, the UK economy appears to be holding its own against global peers.

Sometimes, investment markets can treat 'bad' news as 'good' news, such as when disappointing economic growth brings hope that inflationary pressures will soon ease. At other times, the pendulum swings the other way and 'bad' news is firmly treated as 'just that' - for financial markets at least.

The start of August gave us one such example (for shares, in particular), as concerns over slowing US economic growth led to a 'growth scare', and triggered sharp falls in global stock markets early in the month. Those US technology stocks we have mentioned in previous updates (aka the Magnificent Seven) had enjoyed a long rally in recent months. However in early August, they suffered a hard blow, causing the wider Nasdaq Composite Index to fall nearly 8% in the opening three days of trading.

The situation appeared to be caused initially by the release of a disappointing US manufacturing survey, suggesting there had been a further slowdown in the sector (compared to recent months). Compounded by some underwhelming provisional job reports, and an unexpected (though small) rise in the US unemployment rate, this all served to dampen the mood.

Global markets jumped to the conclusion that all of this pointed to 'bad' news for the US economy and, given how well US shares have been performing this year (i.e. those technology stocks mentioned earlier), investors worldwide rushed to sell shares causing global markets to tumble - albeit they made a rapid recovery over the following few days.

Whilst not all economic data in the US proved so disappointing, what this sudden and unexpected market turmoil did was help cement expectations that the Federal Reserve will start to cut US interest rates when they meet in September - a point re-affirmed by the minutes taken from the July Federal Reserve meeting and also via a high-profile press conference at the end of July. At this gathering, Jerome Powell himself acknowledged that "It’s a very difficult judgement" when referring to weighing up the risks of going 'too soon' against the risks of going 'too late' with rate cuts.

Staying calm and staying invested

From an investor perspective, sometimes it’s worth stepping back, and reflecting, rather than acting on impulse. Markets are quick to react to anything they feel uncomfortable with, and we’ve said in previous updates, that markets hate uncertainty.

In the case of the US job data referred to earlier, one of the most popular is the US Non-Farm Payroll Report (a monthly measure of the health of the US labour market) but, unfortunately, it can be something of a ‘random number generator’ and is often revised at a later date anyway. Therefore, it is not necessarily sensible, nor rational, for investors to place too much emphasis on any of these numbers in isolation. It’s important to keep a level head and stay invested.

For us, as long-term investors, this is another reason why we advocate 'time in' the markets rather than attempting to 'time' markets. Those who remain invested during market falls (such as the brief ones we saw at the beginning of August) will often benefit when markets bounce back - a pattern we’ve seen throughout stock market history, and one of the reasons why we recommend that investing should be for the medium- to long-term (to ride out these short-term periods of volatility).

Temporary turmoil in Japan

The US was not the only cause of market volatility in August - there were bigger moves in Japan. The Bank of Japan's decision to put up interest rates (very slightly, and from a very low starting point) at the end of July further pushed up the value of its currency – an unusual move given many other central banks worldwide are doing the complete opposite and cutting rates.

A strong Yen is generally viewed as bad news for the Japanese stock market (for one thing, it makes the stock market look more expensive to overseas investors). On this occasion, it tumbled by an astonishing 12% at the beginning of August, before making an equally remarkable 9% recovery the following day, as the Bank of Japan sought to reassure markets.

Calmer waters in the UK

Compared to Japan and the US, the UK stock market was less impacted in early August, and suffered smaller falls. The Bank of England cut interest rates by 0.25% at the beginning of the month (to 5%) whilst admitting that the decision was "finely balanced".

The Monetary Policy Committee (MPC) would have welcomed signs that underlying wage growth in the UK is finally starting to slow down (to 5.4% in the period to June) - though financial markets won't want to see too many big union-negotiated pay deals (which could start to push wage growth higher again). The new Labour Government has already made its mark by working to resolve both the train drivers and the junior doctors’ pay disputes in recent weeks.

The UK economy itself continued to grow at a steady - if unspectacular - pace of 0.6% in the second quarter (following growth of 0.7% during the first three months of 2024).

It was also reassuring to see only a modest re-acceleration in UK inflation in July (to 2.2%), and we’d flagged previously that inflation was unlikely to stick rigidly to the 2% target. In August, the Bank of England forecast that inflation will increase to around 2.75%, later this year, before returning to 2% in 2025.

Let’s not forget also that the energy price cap (as set by the energy regulator Ofgem) will start to rise again in October 2024.

Better economic growth is normally good news for the Chancellor of the Exchequer. However, Rachel Reeves has been quick to quash any rumours that purse-strings might be loosened in the Labour Government’s first budget since taking power.

Prime Minister Keir Starmer has highlighted the need to 'fix the foundations' of the UK’s finances - higher than expected public sector borrowing figures for July suggested he may have a point. However, when viewed through the lens of economic concerns in the US and China, political situations in Europe, and sharp market falls in Japan, the UK, with short-term political stability, doesn’t seem to be faring so badly.