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November lay witness to a ‘red wave’ Republican sweep of the presidency and the Congress, not to mention winning the popular vote. The swift and decisive victory by the incoming Trump administration removed the substantial uncertainty that had been building in the weeks before the election and paved the way for markets to stage another strong rally. Analysts estimated that the proposed corporate tax cut would boost earnings by up to 5%, which ensured that all major US indices reached new highs as investors paid little regard to rich valuation metrics.
The MSCI ACWI ex-Australia index delivered a total return of 4.3% to domestic investors in November, led by a strong rally in US equities. The benchmark US S&P 500 posted its best month of 2024, returning nearly 6%, including dividends in local currency. Meanwhile, the small-cap Russell 2000 posted its best monthly gain since December 2023, generating a lofty 11% total return. The Nasdaq Composite returned 6.3%, while the Dow Jones Industrial Index returned 7.7%.
However, the ongoing US dollar strength has put another dent in emerging market equities, losing 3% in Australian dollar terms. The declines were broadly based across Asia and Latin America. Over the last ten years, emerging market equities have delivered less than half the return of their developed nation peers. On a brighter note, hedged returns for global property and infrastructure printed with a 4-handle, as real assets benefited from the sharp decline in real yields in late November. Returns in this space have exceeded 20% over the last twelve months, but remain more muted over longer time horizons.
On the domestic front, the ASX 200 finished the month 3.8% higher, reversing its October losses. Despite the risk-on sentiment, domestic small caps struggled to keep pace with their large cap peers, managing to return 1.3% for November.
Despite wild fluctuations in bond yields, fixed most income markets generally performed positively in November. In the US, the strong growth outlook for corporate earnings saw spreads tighten slightly in investment-grade corporate bonds, with more significant gains in the high-yield space. Agency mortgage-backed securities (MBS) showed signs of recovery, while municipal bonds outperformed Treasurys. Elsewhere, Japanese government bonds continued to underperform due to market expectations of further rate hikes and faster balance sheet reductions in 2025. On the domestic front, the fall in treasury yields was sharper than global peers as ongoing weak economic data helped the composite bond index outperform higher-risk credit indices.
The US dollar strengthened further in light of Trump’s ‘America First’ approach to economic and foreign policy. The US Dollar Index (DXY), which tracks the greenback’s value against a basket of major currencies (such as the euro and the yen), gained nearly 2% after rallying by more than 3% in October. The Australian dollar lost just over 1% versus the US dollar in November.
The US dollar prices of gold, copper, iron ore and crude oil all moved lower during the month.
Finally, crypto posted spectacular gains, with Bitcoin surging by 40% to test the psychological $100,000 mark. The cryptocurrency reached new all-time highs during the month, easily surpassing its previous record set in November 2021. Trump’s re-election victory was a major driver, as investors anticipated a more crypto-friendly regulatory environment and potential institutional adoption of the cryptocurrency.
Australia
On the economic front, the Reserve Bank of Australia (RBA) held interest rates steady in November at 4.35%. The RBA’s quarterly monetary policy statement said the economy was still operating “above capacity”. It projects underlying inflation to move below 3% in mid-to late-2025 and to 2.5% in late 2026. The RBA has maintained it wants to see inflation “sustainably“ in its target band before cutting rates. Labour market data printed softer than expected for October, but the trend data remained strong.
Global
The US Federal Reserve (the Fed) continued to normalise monetary policy despite ongoing economic growth and above-target inflation, cutting the Fed Fund’s target rate by 0.25% to 4.50‐4.75%. Chairman Jerome Powell said the US economy was performing remarkably well, with inflation cooling off, and reiterated that interest rate policy remains data dependent. The Fed’s preferred inflation index, the PCE Price Deflator, printed in line with modest consensus expectations, while personal income easily beat the analyst consensus. Also, October headline retail sales came in higher than expected, with significant upward revisions to September’s data.
Elsewhere, annual inflation in the Eurozone accelerated for a second month to 2.3% in November as last year’s sharp declines in energy prices rolled off. Meanwhile, core inflation remained at 2.7%.
In China, annual retail sales jumped 4.8% in October, exceeding consensus of 3.8%. It was the fastest growth in retail turnover since February, boosted by a week-long holiday and a recent shopping festival. Overall, annual inflation in China remains low, and house prices are still falling.
If you want to discuss any of the above information or your personal investment strategy, then book a chat with your financial adviser here.
The comprehensive victory of Donald Trump in the 2024 US presidential election can be expected to have far-reaching implications for global financial markets and economies. While we don’t have a crystal ball, here are ten key ideas that could play out.
In the near term, the stock market may enjoy a rally, particularly if the Fed continues to cut rates and guides for further policy easing. However, we believe that interest rate reductions in 2025 may disappoint investors if Trump is able to enact his policy proposals quickly and effectively, as touted throughout the recent presidential campaign.
In summary, these are just some of the possible implications of a new Trump administration—and undoubtedly there will be many more (including a few curveballs for good measure). While investors need to remain alert to the changing macro and political landscape, this is not a time to panic. History and experience tell us that investors should look through partisan politics and continue to apply a disciplined and unemotional approach to the management of their investments.
As always, if you have any questions, feel free to book a chat with your adviser.
Thanks for reading.
—Pete
October was a mixed bag for investors as a surge in bond yields weighed on sharemarket returns and pushed fixed interest markets back into the red. A rising US dollar accompanied the spike in bond yields as investors began to bet that a second Trump presidency would be the likely outcome of a close election battle. Trump’s high tariff and corporate tax cut proposals were seen as more likely to restoke inflationary pressures and prevent meaningful cuts in official interest rates in 2025.
In local currency terms, the MSCI ACWI ex-Australia index lost 1.1% in October, including dividends. However, a sharp depreciation in the Australian dollar resulted in a healthy 3.7% return to unhedged domestic investors. The S&P 500 fell 1% in October despite what was seen by analysts as solid second quarter company earnings results. This took the S&P 500 YTD return to 19.6%. The Dow Jones Industrial Average declined 1.3% in the month but is up 26.4% in 2024. Meanwhile, the Nasdaq 100 lost 0.9%, taking its YTD return to 18.2%. The weak October for the Nasdaq followed its first positive September since 2019.
Similarly, emerging market equities lost 2.8% in local currency terms, but this translated to a 1.3% gain in Australian dollars—continuing the momentum gained following the China stimulus announcements in the prior month. Indian stocks had a disappointing October as weak corporate results drove investors away from risk assets.
On the domestic front, the ASX 200 finished the month 1.3% lower. Meanwhile, rising yields impacted returns in domestic and global listed property stocks. Notably, domestic listed property has now returned more than 50% over the last twelve months.
In fixed interest, global bond yields were generally higher, despite the US Fed cutting interest rates in September and guiding for further policy easing over the coming months. The US 10-year Treasury note finished the month 56 basis points above its low point for the month at 4.28%. Not to be outdone, the 10-year Commonwealth Government Bond yield surged to 4.51% by month’s end, after trading as low as 3.92% at the beginning of October. In credit markets, European high-yield bonds performed strongly, with investors reacting favourably to the ECB’s interest rate easing cycle.
Elsewhere, global oil markets experienced higher than average levels of volatility in October, ultimately posting a small gain in US dollar terms, as investors weighed the potential for a further escalation in tensions in the Middle East. Gold benefited from the heightened uncertainty emanating from a range of factors, including geopolitical machinations, the US presidential election outcome and the risk of a spike in inflation, to name a few.
The increase in financial market volatility proved beneficial for hedge funds, where global returns jumped 5.2%, though the asset class lags cash over the last twelve months.
Australia
In Australia, the labour market continued to boom, and the unemployment rate remained at 4.1% despite a massive increase in workforce participation. Employment grew by 64,100 in September, and there were 9,200 fewer unemployed people. The main focus during the month was the September quarter CPI figures that showed the annual pace of inflation slowed to 2.8% from 3.8% in the previous quarter due to electricity bill rebates and lower fuel prices. Electricity bills fell 17.3% over the quarter as households received their first quarterly instalment of a $300 federal government energy rebate, as well as generous state-level grants. Yet, core inflation – the RBA’s preferred measure – gained 0.8% quarter-on-quarter, which was above forecasts for a 0.7% increase. Annually, the measure cooled to 3.5%, in line with expectations.
Global
On the economic front, US consumer prices (as measured by the CPI) rose 2.4% in the year to September, a three-year low, though that pace was higher than the 2.3% economists had expected. Overall, inflation was held down by a significant decline in fuel prices, which fell 4.1% month over month. Core inflation rose 3.3% in the year to September, again higher than expected. Notably, food prices have jumped nearly 25% from pre-pandemic levels, well beyond the pace of wage growth. In response to higher food prices, many consumers have shifted their spending from name brands to private labels and are shopping more at discount stores. A similar theme is emerging in Australia.
Meanwhile, in Europe, the ECB lowered its three key interest rates by 0.25% in October, as expected, following similar moves in September and June. However, data released over the following weeks showed that annual inflation accelerated to 2% in October, above expectations and up from 1.7% in September (which was the lowest level since April 2021). Food prices drove the surprise strength in the data. On a more positive note, annual services inflation steadied at 3.9%. Meanwhile, annual core inflation was unchanged at 2.7%, the lowest read since February 2022, but slightly above consensus forecasts. Finally, Eurozone GDP expanded 0.4% in the September quarter, the strongest growth rate in two years and well above expectations. The ECB expects Eurozone GDP to expand 0.8% this year.
If you want to discuss any of the above information or your personal investment strategy, then book a chat with your financial adviser here.
September will be mostly remembered for the US Federal Reserve (the Fed) cutting interest rates by half of a percentage point (-0.5%) to a 4.75-5% range. It was the first reduction since 2020, with the Fed signalling more reductions would follow. The Fed is currently less concerned with inflation and more concerned about a potentially weaker economy after jobs growth began to slow. Fed chair Jerome Powell noted that the policy change was not “mission accomplished” on inflation and cautioned against assuming the 0.5% cut sets a pace that Fed officials would continue.
In local currency terms, the MSCI ACWI ex-Australia index gained 1.9% in September. However, a further rally in the Australian dollar resulted in a weaker 0.1% return to unhedged domestic investors. Similarly, emerging market equities returned 5.6% in local currency terms, but this translated to a 4.4% gain in Australian dollars. Global hedge fund returns were wiped out by the higher domestic currency. Better performances emanated from hedged global infrastructure and hedged global property, which enjoyed returns of 3.1% and 2.0%, respectively.
The S&P 500 rose 2% for the month, taking its YTD return to 20.8%. The Dow Jones increased 1.9% in September and is up 12.3% in 2024. Meanwhile, the Nasdaq Composite gained 2.7%, marking its first positive September since 2019. Emerging market equities rose strongly on the announcement of a significant China stimulus package.
Meanwhile, the ASX 200 set a new record high on the final trading day of the month, driven by the mining sector’s response to China’s stimulus announcement. The ASX 200 finished the month 3.0% higher. Falling bond yields saw another surge in listed property stocks (+6.6%) and small caps (+5.1%). Listed property has now returned 47% over the last twelve months, partly due to AI-related distortions.
The Australian dollar finished September above US$0.69, while iron ore futures spiked more than 10%, the biggest intraday rise since September 2021. This culminated in the mining sector recording its best five-day return since October 2015.
Not to be outdone, China’s CSI 300 index of the largest stocks listed on the Shanghai and Shenzhen exchanges quickly entered a bull market, advancing more than 20% from the month’s low.
During September, most global interest rate markets exhibited a sharp “bull-steepening”. This occurs when interest rates decline across the yield curve, and shorter-term rates decline more than longer-term rates, i.e. the yield curve lowers and “steepens”. The US Federal Reserve’s mid-month 0.5% official interest rate cut was key in driving this performance pattern, but so were rising expectations of further rate cuts in Europe. In contrast, the Reserve Bank of Australia’s continued resistance to rate cuts (given Australia’s inflation dynamics) meant the Australian yield curve changed little over the month.
Global bond yields were generally lower, with the US 10yr Treasury note finishing the month at 3.78%. However, the domestic 10yr Commonwealth Government Bond inched up by less than 1bp to 3.97%.
In terms of performance in the fixed interest asset class, global credit markets surged due to a significant easing in financial conditions. High-yield bonds made solid capital gains after the Fed cut rate cuts, overshadowing the risks to the macro landscape. With the RBA remaining relatively hawkish, most domestic fixed interest segments underperformed global peers—but over the past year, they have still outperformed cash. However, the annualised returns over the last five years remain weak for traditional defensive asset classes as yields are now broadly higher than during that period.
Elsewhere, gold and copper made steady gains, while iron ore futures jumped on the final trading day (not reflected in our table) on the China stimulus announcement. In contrast, crude oil prices weakened despite escalating tensions in the Middle East.
Australia
In Australia, the Reserve Bank’s September board meeting resulted in no change to official interest rates for a seventh consecutive time. In the accompanying statement, the RBA stressed that underlying inflation remains too high and is more indicative of price momentum. There is increasing pressure on the RBA to cut rates after the June quarter GDP figures showed that the economy was close to stalling and that a per capita recession was showing no signs of reversing. Elsewhere, the August unemployment rate was steady at 4.2%, despite the creation of 47.5k jobs (above consensus).
Rest of world
Falling energy prices saw US inflation moderate to 2.5% in the year to August, marking the fifth straight annual drop and the smallest such increase since February 2021. However, core inflation remained sticky over the same period, printing at 3.2%, after shelter costs rose by 0.5% in August. Wages growth eased further in August, while jobs growth was modest at just 142k.
Meanwhile, China’s central bank announced it would lower the required reserve ratio, reduce borrowing costs on more than US$5 trillion of mortgages, and ease deposits for second homes. It later announced permission to refinance mortgages from November 1st, meaning borrowers on fixed-rate mortgages can negotiate cheaper loans. China also eased curbs on property purchases in its so-called tier-one cities, which have restricted non-local buyers to reduce speculation for years. Trading hub Guangzhou became the first major city to remove all restrictions on housing activity, ditching home buyer eligibility screening and no longer restricting the number of homes one person can own. Shanghai and Shenzhen loosened their rules too. Finally, authorities also announced US$100 billion of liquidity support for its beleaguered equity market and plans for a stock stabilisation fund.
For personalised investment advice or to understand how this information may impact your investments, schedule a chat with a Pekada financial adviser today.
Tough times returned at the beginning of August, as financial markets experienced a jolt of volatility. US economic uncertainty sparked a global sell-off, exacerbated by multiple factors—a combination of concentrated market trading, rich PE multiples, hedging of short volatility strategies, heightened geopolitical tensions, and the unwinding of the yen carry trade resulted in tumult – albeit briefly.
Despite the initial market tumult early in the month, equities quickly recovered losses as the likelihood of a soft landing increased. It wasn’t all good news for Australian investors however, as a surge in the Australian dollar impacted global returns for unhedged domestic investors.
A recent presentation from Goldman Sachs showed the historical experience that investors typically profit when buying the S&P 500 index following a 5% sell-off. Since 1980, an investor buying the S&P 500 index 5% below its recent high would have generated a median return of 6% over the subsequent 3 months, enjoying a positive return in 84% of episodes. Corrections of 10% have also been attractive buying opportunities more often than not, but with weaker hit rates of outperformance than following 5% drawdowns. Note that the forward path of the S&P 500 following 10% corrections has been markedly different during environments of resilient economic growth relative to correction ahead of recessions.
Source: Goldman Sachs Global Investment Research
Throughout August, the Fed signalled that it would likely cut rates in September as inflation risks subsided. Of note, Fed Chair Jerome Powell confirmed a shift in the Fed’s focus towards the labour market during his speech at Jackson Hole. The changing interest rate landscape tends to have important implications for equities. Historically, when the Fed cuts rates in the absence of a recession, the S&P 500 tends to rise strongly in the following twelve months, compared to remaining flat during a recession scenario. As concerns about economic growth diminished, market expectations began to favour a 0.25% cut over a 0.5% cut, with about 1% of rate cuts expected by year-end.
In local currency terms, the MSCI ACWI ex-Australia index gained 1.8% in August. However, the Australian dollar rally resulted in a 1.3% loss to unhedged domestic investors. Similarly, Emerging market equities returned 0.4% in local currency terms, but this translated to a 2.2% loss in Australian dollars. The same was true for the global hedge fund index, which was unable to take full advantage of higher volatility earlier in the month. Stronger performances emanated from the hedged global infrastructure and global property indices, which enjoyed returns of 3.1% and 2%, respectively.
Turning to corporate results, the Q2 earnings season in the US was relatively strong. According to FactSet, earnings per share (EPS) beat consensus nearly 80% of the time, versus the 10-year average of 74%. Financials stocks enjoyed the largest positive EPS surprise, with an average beat of 13.7%, followed by Utilities with 10.1%. However, the domestic August full year reporting season was less impressive. According to Goldman Sachs, weaker-than-expected margins (on average) meant that misses outnumbered beats (38% vs 32%), with the ratio of beats to misses (0.8x) well below the long-run average (1.4x). While dividends fell 1.9%, the decline was only around half the consensus expectation due to rising payout ratios and some unexpected special dividends from the retail sector. Outlook commentary was generally cautious, contributing to earnings revision trends being weaker than usual. Following the positive Q2 earnings season, the US S&P 500 rose 2.4% (including dividends), with the index closing the month just below its record high reached only six weeks prior. The Dow Jones Industrial Average returned 2.3% (including dividends) to end August at a new closing high.
Closer to home, the ASX 200 delivered a total return of 0.5%, eclipsing its small-cap peers, which lost 2% in August. Meanwhile, Australian listed property saw its returns muted by the weaker performance of its largest constituent, Goodman Group (ASX: GMG).
As investors gained confidence that the US Federal Reserve (the Fed) would commence its rate-cutting cycle in September, gold rallied, and the US dollar fell against most major currency crosses. Mixed economic data and the prospect of falling interest rates boosted fixed income markets, which enjoyed the fourth consecutive month of positive returns (the longest streak since 2020). Another positive sign for fixed interest investors was the return to more traditional correlations with equities, whereby bonds provided protection against an equity market drawdown. Meanwhile, cash eked out another modest return. In stark contrast, Bitcoin lost 8.4% as investor appetite for risk diminished during August.
Australia
In Australia, the Reserve Bank’s August board meeting resulted in no change to official interest rates. This didn’t come as much of a surprise, as the June quarter CPI inflation figures printed slightly below expectations. The CPI data fuelled debate among ideologically opposed economists about whether monetary policy settings were appropriate. Meanwhile, a fiscal policy debate was conducted similarly, with Treasurer Chalmers pointing to recent budget surpluses—while detractors pointed to the role increased government spending was having on the inflation front. Watch this space!
The monthly CPI rose by 3.5% y/y in late August, above consensus expectations. Elsewhere, the July unemployment rate increased to 4.2% as the participation rate hit a record high of 67.1%. A surge in jobs during July exceeded expectations and was coupled with an upward revision to June employment growth.
Rest of world
On the economic front, the US economy added 114k jobs in July 2024, well below a downwardly revised 179k in June and forecasts of 175k. It was also the lowest level in three months and below the average monthly gain of 215k over the prior year, signalling the labour market is cooling. Average hourly earnings also came in below forecast.
Increased workforce participation pushed up the unemployment rate to 4.3% from 4.1% in June. The rise in the unemployment rate triggered a famous recession indicator known as the “Sahm Rule”. However, initial jobless benefit claims remained low during August, and there was an absence of mass layoffs. These indicators would be much higher if the economy was experiencing a hard landing.
For personalised investment advice or to understand how this information may impact your investments, schedule a chat with a Pekada financial adviser today.
For more than twelve months, sharemarket volatility has been unusually low, and US equities have delivered strong returns, fueled by an AI-led boom in mega tech. Narrow leadership and expansive PE multiples have been consistent features over this period, resulting in increased market concentration and weaker internals, such as market breadth. In the eyes of some, investors were complacent and ignoring what appeared to be growing risks.
Exhibit 1: VIX ̶ CBOE Volatility Index for the US S&P 500, daily data (tradingeconomics.com)
“The Cboe Volatility Index, or VIX, briefly broke above 65 on Monday morning, up from about 23 on Friday and roughly 17 a week ago. It had cooled to around 38.6 by about 4 p.m. ET in New York, which would still be its highest closing level since 2020.” ̶ www.cnbc.com
Conversely, bond markets have experienced relatively high levels of volatility as traders position and reposition around changing inflation and interest rate expectations. In May, economic data surprises started to turn negative, and by early July, a soft patch of economic data (including better-than-expected CPI figures) triggered excitement among investors that the US Federal Reserve (the Fed) would commence its rate-cutting cycle in September. The data during this period highlighted:
While risks of a recession had risen, investors initially welcomed the data and were broadly anticipating a ‘soft landing’. Bond markets played host to bull steepening (shorter-term yields decline by more than longer maturities). This kicked off a fierce rotation out of mega tech names trading on stretched PE multiples into the unloved SMID-cap space, where corporate borrowers are more exposed to variable interest rates. The ‘great rotation’, as it has come to be known, continued throughout July and reached fever pitch at month’s end when Fed chief Jerome Powell gave the strongest indication to date, that a September interest rate cut was indeed on the cards.
Exhibit 2: US quarterly core CPI – annualised rate (www.fred.stlouisfed.org)
However, weak manufacturing and jobs market reports in early August sparked fear that the US economy might be heading for a ‘hard landing’. The now famous Sahm Rule had been triggered, and the protracted yield curve inversion in US Treasuries(Treasurys) began dissipating quickly. Historically, such moves have been pretty reliable indicators that a recession was in the offing or had already commenced. If the US were to enter a deep recession, corporate earnings would surely miss lofty expectations, and high market PE multiples would need to be unwound.
Contemporaneously, geopolitical risks heightened in the Middle East when Israel responded to the killing of twelve youths by assassinating the Tehran-based political leader of Hamas and a senior Hezbollah commander with an airstrike on Beirut. The rising potential for a coordinated attack on Israel by Iran, Lebanon and Yemen worsened investor sentiment as this would surely draw the US directly into the conflict.
Meanwhile, a tectonic shift had just taken place in Japan. In late July, against expectations, the Bank of Japan (BoJ) raised interest rates to 0.25% from 0.10% and unveiled plans to halve its bond purchases. However, in the preceding months, global investors had been borrowing heavily in Yen to buy US tech stocks (at the same time as massive flows into Japanese equities). The unexpected narrowing of the interest rate differential between the US and Japan saw a dramatic appreciation in the Yen against the US dollar. This triggered margin calls for foreign hedge funds and speculators as the Yen carry trade unwound. Japanese equities slumped by 20% across a few trading sessions, and falls in global sharemarkets, including Australia, were magnified.
Overall, the above factors led to an extraordinary spike in volatility and a sharp drawdown in equity markets. As can be seen in Exhibit 1, the VIX (often referred to as Wall Street’s ‘fear gauge’) experienced a significant and dramatic surge. Investor anxiety resulted in the largest-ever intraday jump on Monday, August 5th, with the VIX closing at its highest since October 2020, as panicked traders hedged against market volatility during the sell-off. The benchmark S&P 500 was down as much as 4.3% intraday on Monday and closed down 3%. (The ASX 200 slumped 3.7%.)
Before the August drawdown event, volatility had been relatively low for more than a year, highlighting positive risk appetite among equity investors. A combination of calm trading and strong returns created conditions where “short-volatility” strategies could thrive (e.g., ETFs that profit from calm markets). Indeed, until late July (when Alphabet and Tesla missed earnings expectations), the S&P 500 had gone 356 trading days without a 2% fall —its most substantial run since 2017. However, the initial sell-off on July 25th placed a spotlight on the remaining Magnificent 7 stocks. More concerns were raised around their high multiples and still-high index weightings despite the ‘great rotation’.
So, when volatility exploded in early August, potential systemic risks were highlighted because the absence of short-volatility strategies quickly incurred substantial losses, requiring positions to be unwound and exacerbating market instability.
Returning to the economy for a moment, the risk of some kind of recession (mild or deep) has recently increased significantly. The Sahm Rule states that when the US’s 3-month moving average national unemployment rate rises by half a percentage point (0.5 pts) from its lowest 3-month average level in the preceding 12 months, the economy is in a recession or will enter one soon. The July labour market data triggered the Sahm Rule, with a reading of 0.53 pts.
Exhibit 3: Real-time Sahm Rule Recession Indicator (www.fred.stlouisfed.org)
But is this time different due to Covid-related labour market distortions?
While jobs growth in the US has been weak in 2024, this has coincided with a rise in workforce participation. The latter appears due to the return of workers who left the labour force during the pandemic. Upward moves in the participation rate can result in a higher headline unemployment rate in the short term, as many workers do not find employment. But, the increased labour supply can drive growth over the longer term, especially if productivity rises. Also, it is not unusual to see weak labour market data during the summer months. The pandemic may have exacerbated this seasonality, and the statisticians may not accurately capture it. As the US moves into autumn, we expect to get a clearer picture of the state of the jobs market. Given the above discussion, if ever there was going to be a false positive in the Sahm Rule, this is as likely as any scenario.
There are rising risks of a US recession, with some investors fearing a ‘hard landing’. Our view is that the data so far points to a softer landing (as opposed to a deep recession) and that the market moves in early August were overdone due to a multitude of factors.
The data could deteriorate from here, but the most recent service sector report showed that services had rebounded moderately, with stronger employment. Real-time measures of logistics activity still point to modest expansion. Meanwhile, personal income growth remains positive. However, risks remain around high levels of consumer debt and a weaker savings rate. Earlier this year, an analysis by the San Francisco Federal Reserve concluded that post-pandemic surplus savings had been exhausted. Hence, a step down in financial market returns would be an unwelcome development. If the middle classes begin to worry about their job security and dramatically cut spending in line with poor consumer confidence surveys, then job losses could become a self-fulfilling prophecy.
If a hard landing was imminent, the Fed could implement out-of-cycle emergency rate cuts. But an emergency rate cut by the Fed would further reduce yield differentials between the US and Japan, again spooking markets and eventually leading to a rebound in inflation (could we see a repeat of the 1970s?). Such a scenario cannot be ruled out and would eat into the recent bond market gains, leaving investors scrambling for truly defensive exposures until confidence returned.
We expect further pockets of volatility over the coming period as economic data surprises in both directions. Our view is that the data so far points to a softer landing, but this could change. For now, however, it does not seem like the time to rush to the exits.
In times where volatility returns, it’s important to remove emotion from investing—which I appreciate is easier said than done when it comes to personal finances.
While it doesn’t make it any more fun to go through, it is good to remember that volatility and material falls in investment markets are completely normal and should be expected—we typically see a fall of 10% each year on average.
We are hopeful that the volatility will present opportunities for patient long term investors, and will be in touch with any important updates.
For personalised investment advice or to understand how this information may impact your investments, schedule a chat with a Pekada financial adviser today
July witnessed significant changes in the interest rate outlook by markets, resulting in a bond market rally and equity market rotation away from mega-cap tech into the small- and mid-cap space (SMIDs). The latter was most noticeable globally, where a softer patch of US data boosted confidence that the Federal Reserve (the Fed) would likely commence its interest rate cutting cycle in September. A weaker jobs report and better-than-expected consumer inflation figures were the main catalysts, adding to a surprise contraction in the services sector.
Sharemarkets were broadly higher, the MSCI ACWI ex-Australia index posted a gain of almost 4% in July, as investors gained confidence that the Fed would deliver its first rate cut in September.
Industrials, value stocks, SMID-caps and bond proxies performed strongly in a period that saw a fierce rotation out of mega cap tech stocks, where valuations are seen to be stretched.
Market breadth improved for the S&P 500 as 364 stocks enjoyed price rises, compared to just 201 in June. Meanwhile, the Dow Jones Industrial Average set three new closing highs during the month. The Q2 corporate earnings season got off to a solid start. Of the 60% of S&P 500 companies that reported, 80% announced a positive surprise, implying an overall annual earnings growth rate of 10.2% (versus the 8.9% consensus expectation at the end of June).
Total returns in US dollar terms included a 1.2% rise in the benchmark S&P 500; a 4.5% increase in the Dow Jones Industrial Average; and a 1.6% loss in the NASDAQ 100. Meanwhile, the small-cap dominant Russell 2000 spiked by 10.2%, outperforming the S&P 500 by the largest margin in history. This move out of the large tech stocks, in particular, into unloved small-cap names has come to be known as the “great rotation”. Smaller companies are expected to disproportionately benefit from lower funding costs, as the broader sector is highly exposed to variable rate loans. More broadly, value again outperformed growth during July, as several mega caps derated.
In Australia, where the macro landscape features a stalling economy and stubbornly high inflation, investors were less enamoured with small caps, where strong returns (nonetheless) failed to keep pace with the ASX 200’s 4.2% increase. Meanwhile, domestic listed property spiked 6.8%, but this lagged global property, which surged 8.2%.
The ASX finished the month on a strong note after the June quarter CPI data came in better than expected, thereby erasing any chance of a potential August increase in the official cash rate. The Australian dollar slumped in response to the news. The retailing, gold, banking and property sectors were the strongest performers during July. Of note, on July 12, Commonwealth Bank shares hit a record high, with the bank overtaking BHP as the largest company on the domestic market. Elsewhere, the increase in market volatility was a welcome development for the hedge funds sector, which saw the HFRX global hedge fund index post its strongest return since January.
Bond markets rallied strongly, as yield curves shifted lower and steepened (so-called bull-steepening, where short-term yields fall by more than their longer-term equivalents). Defensive assets benefited from rising geopolitical risks, with Hamas announcing that Israel had killed its political leader. Just hours earlier, Israel said it had killed a senior Hezbollah commander with an airstrike on Beirut in response to an attack in the Golan Heights.
Elsewhere, gold jumped 5.2% on rising geopolitical risks, while oil prices declined on the prospects of increased output. Finally, crypto assets followed risk markets higher, with investors buoyed by the possibility of new ETFs entering the market.
Australia
In domestic news, the main focus was on the CPI data for the June quarter, which was not as high as feared. Underlying trimmed mean inflation – the RBA’s preferred measure of inflation – on an annual basis cooled to 3.9% in the June quarter from 4%. For the quarter, underlying inflation came in at 0.8%, down from 1%. The consensus was for both figures to hold steady. Many economists quickly ruled out the prospect of a rate rise at the upcoming August RBA board meeting. The inflation data also saw traders bring forward their expectations of a rate cut by several months to February 2025. In other news, the June unemployment rate inched up to 4.1%, as a substantial increase in workforce participation outweighed robust employment growth.
Rest of world
On the economic front, the US Fed left its policy rate unchanged in its July meeting, but in the ensuing press conference, Chair Jerome Powell indicated that a rate cut could be on the table at its September meeting if: “…the totality of the data, the evolving outlook, and balance of risks are consistent with rising confidence and maintaining a solid labour market.” Previously, US central bankers have said it would be appropriate to reduce borrowing costs before inflation actually returns to their target to account for lags in monetary policy. Weaker data releases during July suggested that the US was headed for a ‘soft landing’ instead of a severe slump. US Q2 GDP exceeded expectations on solid consumer spending, while price rises were contained, but jobless claims were again starting to rise.
Finally, the Bank of Japan raised its benchmark interest rate to 0.25% from 0.10% and unveiled plans to halve its bond purchases by the first quarter of 2026. While the BoJ’s interest rate remains low by global standards, it is now at its highest level since December 2008. Some saw the move as a response to the persistently weak yen, as pressure has been mounting from Japan’s government to boost the currency.
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Sharemarkets continued to rebound in June, led by large-cap equities and companies with strong earnings growth profiles. The major central banks of Europe and Canada cut interest rates in June. Meanwhile, the Reserve Bank of Australia (RBA) and the US Federal Reserve (the Fed) continued to remain on hold. Improving global inflation data was welcomed by fixed-interest markets, but higher oil prices and shipping costs could hamper further improvements over the coming months.
The MSCI ACWI ex-Australia index posted a gain of 1.8% in June, as growth again outperformed value. Emerging markets rose strongly, with investors focusing on improved economic data releases and the prospect of lower interest rates in developed nation peers, thereby reducing risks to capital flows for EM countries.
More broadly, at the global level, companies exposed to artificial intelligence continued to outperform other areas of the market, which has been a defining theme throughout the year. Notable events included Apple’s unveiling of its custom AI system, “Apple Intelligence,” which helped push its stock to new record highs. Despite the US market’s overall positive performance, some concerns emerged towards the end of the month. High-flying stocks, such as Nvidia, fell sharply in late June on signs of potential market exhaustion. “Magnificent Seven”, which refers to the seven largest technology companies listed in the US. These companies, including NVIDIA, Apple, Microsoft, and Amazon, have significantly skewed the market’s performance—and these 7 businesses account for 59% of the S&P500’s ~15% rise year to date (YTD).
Source: Bloomberg, Lonsec estimates.
US indices benefited from ambitious upward revisions to consensus target prices. The S&P 500’s one-year price target increased for a seventh month to nearly 6,000. The Dow target price also increased for the seventh month, after two months of declines, to more than 43,000. Both indices would need to rise by around 10% over the next twelve months to meet these targets. The US S&P 500 posted seven new closing highs throughout June to finish 3.6% higher (including dividends), while the Dow Jones Industrial Average gained 1.2%. However, it was again a stellar performance by the tech-heavy Nasdaq 100, which jumped 6.3% in June and posted another record high during the month.
On the ASX, in a repeat of the prior month, Financials, Staples and Utilities produced strong performances in June, while the resource-heavy Materials sector was deeply negative. Lithium and gold stocks sold off heavily, while the diversified mining giants such as BHP Group and Rio Tinto lagged the market on sharply lower iron ore and copper prices. Overall gains on the domestic front were solid, with the ASX 200 accumulation index gaining 1.0%. While the strength of large-cap names was notable, the opposite was true in the small-cap space, where most indices finished in the red. The ASX Small Ords gave back 1.4%, while the US S&P SmallCap 600 posted a 2.5% decline.
Fixed interest markets benefitted from the move lower in yields. On the local front, Australian 10-year yields decreased by 10 basis points over June to 4.31%. However, bonds with shorter maturities, such as for 2 and 3 years, saw yields finish the month flat or slightly higher than in May. This reflects ongoing uncertainty about the RBA cash rate outlook as domestic inflation remains sticky. Credit markets enjoyed another positive month as spreads (a risk indicator) remained low. However, as in May, investors favoured investment-grade issuers with resilient business models and conservative balance sheets.
Elsewhere, gold, copper and iron ore were lower in June, while Bitcoin reversed some of its huge gains so far in 2024.
Inflation remains sticky, but the direction is down as collective monetary policy settings have tightened fiscal conditions and COVID-era stimulus wanes. Australia is the exception, recent figures show inflation still running well above the Reserve Bank of Australia’s target band of 2-3%, and the impact of the Stage 3 tax cuts has yet to manifest.
Source: Lonsec estimates, Bloomberg.
Australia
On the economic front, the Australian economy barely grew in the March quarter, expanding by just 0.1% on the back of higher government spending and household outlays on necessities such as electricity and rent. Concerns that households are saving much less than previously, combined with the disposable income boost from the stage 3 tax cuts, prompted some economists to push back rate cut expectations into 2025.
Meanwhile, the May monthly CPI data was again worse than expected. Appearing before a Senate committee, RBA governor Michele Bullock said she “won’t hesitate to move and raise interest rates again” if underlying inflation proved stickier than expected and confirmed state and federal government energy rebates would not affect the timing or direction of interest rates. Bullock also added interest rates would only be cut when the board was convinced that inflation was falling “sustainably” into the 2-3 percent target band.
Australia’s CoreLogic Home Value Index climbed 0.7% in June 2024, registering the 17th consecutive month of expansion.
Rest of world
Elsewhere, inflation in the US eased in May, with headline consumer prices recording zero growth, pushing the annual rate down to 3.3% from 3.4%. Core inflation – which excludes food and energy costs – rose just 0.2% in May, taking the annual rate down to 3.4% from 3.6%. Both readings were better than expected and left financial markets pricing in a higher chance of a cut to US interest rates in September. Also, on the US inflation front, the May core personal consumption expenditures (PCE) price index rose by 0.1% in May and declined to 2.6% growth over the last twelve months. Personal spending and income increased solidly in May, while the saving rate edged up to 3.9%.
In Europe, the European Central Bank (ECB) lowered interest rates by 25bp in June, which was in line with expectations, marking a shift from the previous nine months of stable rates. However, domestic price pressures remain elevated, suggesting inflationary challenges remain and have seen Eurosystem staff projections for headline inflation and growth being revised up for 2024 and 2025.
UK retail sales in May were much stronger than expected as consumers took advantage of heavy discounting.
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Financial markets bounced back in May, following heavy falls in April. At the beginning of the month, the US Federal Reserve (the Fed) signalled that interest rates would likely stay higher for longer because of sticky inflation but dismissed any chance of a rate rise this year. Bonds and equities responded favourably, which set the scene for positive returns in May.
Bond yields fell sharply, easing some of the sharemarket valuation pressures built throughout the year. Investors also focused on first-quarter US corporate earnings during the month, which continued to surprise to the upside but by less than historical averages. The upside was led by the Magnificent 7—however, the remaining S&P 500 stocks displayed a negative blended earnings growth rate. This has raised concerns around so-called ‘market internals’ such as market breadth, with some commentators warning about increased risks to future returns. Interestingly, FactSet pointed out that 38% of S&P 500 companies mentioned “AI” on their earnings calls.
US indices performed strongly. The S&P 500 closed 4.8% higher in US dollar terms, more than reversing its April losses. The Dow Jones Industrial Average gained 2.3%, while the Nasdaq Composite jumped 7% in May, with these indices also posting record highs during the month. Tech gained 10%, and Utilities rose 9%, both on the back of the AI trade and strong earnings. At the opposite end of the spectrum, Energy declined by 0.4% due to falling oil prices, and consumer discretionary was broadly flat as Consumer Spending concerns were highlighted on multiple corporate earnings calls. Of note, Nvidia +26%, Apple +13%, Microsoft +6.8% and Alphabet +6%, accounted for more than half of the S&P 500’s 4.8% monthly gain.
The MSCI ACWI ex-Australia index posted a gain of 1.7% in April, with unhedged domestic investors impacted by a stronger Australian dollar over the month. While emerging markets were one of the few bright spots during the April sell-off, their fortunes turned negative in May as Chinese equities underperformed despite better-than-expected economic data releases. Markets remain unconvinced that China can stage a sustainable turnaround until it resolves the malaise surrounding its property sector. Elsewhere, Japan also posted a negative return in May as rising yields began to impact sentiment. The Japanese 10-year government bond traded above a 1% yield for the first time in over a decade.
Gains on the domestic front were more modest. The ASX 200 Accumulation Index gained 0.9% in May, well ahead of its small-cap peers, which fell 0.1% during the month. The AREIT sector returned 1.9%, as long-term bond yields moved lower. On the ASX, Utilities, Staples and Financials (including property stocks) performed the strongest in May. However, Materials (which includes large resources companies) weighed on returns and drove underperformance relative to most developed market peers.
For fixed-interest markets, falling yields allowed investors to breathe a sigh of relief. Credit markets fared best as corporate borrowing costs moved lower during the month, benefiting returns. The broader global and domestic fixed interest benchmarks also posted gains. Cash returns continued to inch higher. Over the last twelve months, cash has easily outperformed most defensive asset classes and is just 20 basis points behind investment-grade credit returns. Elsewhere, gold, copper and iron ore were slightly higher in May, while crude oil finished in the red. Bitcoin jumped 12.5%, as crypto behaved like a proxy for geared sharemarket exposure and maintained its volatile return profile.
On the economic front, Australia’s April monthly CPI printed well above expectations, with markets and economists revising their cash rate outlook. Markets expected the monthly CPI to slow to 3.4% annually, but it instead rose to 3.6%, driven by food and housing costs. This was the second month in a row where annual inflation posted a small increase. The monthly CPI indicator, excluding volatile items and holiday travel, remained unchanged at 4.1% in April. Money markets responded by pushing back the timing of any interest rate cuts until July 2025, while several economists called for the RBA to raise interest rates to close to 5% (currently 4.35%) to tame inflation.
Earlier in the month, domestic labour market data was weaker than expected, with unemployment rising as more workers entered the jobs market. However, the data may have been a statistical quirk that could unwind due to an unusually large increase in the number of unemployed people waiting to start a new job.
Turning to the US, the Fed kept interest rates steady at its May meeting and was relatively dovish in its language but noted that inflation was not slowing as quickly as expected. US economic growth slid to just 1.3% on an annualised basis during the March quarter, below the expectations of analysts and the Fed’s economic projections. As the month progressed, the April CPI data exceeded expectations for the third consecutive month, highlighting that inflation was indeed sticky. However, retail sales figures provided more evidence of moderating activity and that households were becoming increasingly stressed.
In Europe, the European Central Bank (ECB) paved the way for an interest rate cut over the next few months, noting that wage growth had slowed and inflation was likely to moderate further, notwithstanding a stronger-than-expected CPI read in May. UK inflation is also moderating, but the services component remains close to 6%, potentially stifling any plans the Bank of England might have to cut interest rates.
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Treasurer Jim Chalmers delivered the Labor Government’s 2024-2025 Federal Budget and we have summarised what we feel are the key points which impact financial planning strategies.
For our ongoing service package clients, your adviser will be in contact to provide guidance on changes which may impact your strategy.
IMPORTANT: Please remember that these measures are subject to becoming law, so be sure to confirm this before taking any action.
Starting 1 July 2024 Stage 3 tax cuts will deliver savings of $4,529 per annum for those in the highest tax bracket. The average taxpayer will save $1,888 a year.
The Stage 3 tax cuts will make the following changes from 2024/25:
The table below shows the changes to tax brackets. Note, these amounts do not include Medicare levy.
The table below compares the amount of tax payable in 2023/24 to the amount payable under the new tax rates from 2024/25. The last column shows the amount of tax saved.
The Government has increased the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from 1 July 2023 to provide cost-of-living relief. The increase to the thresholds ensures that low-income individuals continue to be exempt from paying the Medicare levy or pay a reduced levy rate.
The family income thresholds will now increase by $4,027 for each dependent child, up from $3,760.
This measure has already been provisioned for by the Government and will apply retrospectively from 1 July 2023.
The Government has announced that it will pay super on the Government funded Paid Parental Leave for babies born or adopted on or after 1 July 2025.
Eligible parents will receive an additional 12% of their Government-funded Paid Parental Leave as a contribution to their superannuation fund.
Starting from July 1, 2026, employers must pay superannuation at the same time they pay salary and wages to employees. Currently, employers are required to pay their employees’ superannuation guarantee contributions on a quarterly basis.
Energy bill relief will be extended to every Australian household, with $300 automatically credited to their electricity bills next financial year. This is not means tested.
HELP/HECS debt will now be indexed either to the Consumer Price Index (CPI) or the Wage Price Index (WPI), whichever is lower, and that change will be backdated to 1 June 2023.
This means that about 3 million Australians with student loans are set to receive an average $1,200 reduction in their HELP, HECS, VET Student Loan, Australian Apprenticeship Support Loan and other student support loan accounts that existed on 1 June last year.
The reduction aims to offset steep increases in student debt last year when student loans were indexed to inflation at the rate of 7.1%, but wage growth remained low. The 2023 indexation rate based on WPI would only have been 3.2 per cent.
The Government has announced a one-year freeze on the maximum Pharmaceutical Benefits Scheme (PBS) patient co-payment for everyone with a Medicare card and a five-year freeze for pensioners and other concession cardholders.
This change means that no pensioner or concession card holder will pay more than $7.70 (plus any applicable manufacturer premiums) for up to five years.
The current freeze on deeming rates, which are used to determine the amount of income a person is deemed to earn from their financial investments, will be extended for another year. This means that the deeming rate will stay at 0.25% for the lower rate and 2.25% for the higher rate.
This will ensure income support recipients, such as age pension recipients, will not see a reduction to their payments due to an increase in the deeming rates over the next year. It also means there will be no negative impact for Commonwealth Seniors Health Card holders and means-tested aged care recipients.
Commonwealth Rent Assistance maximum rates will be increased by 10% from September 2024, with the aim of helping address rental affordability in the housing market.
The Government has announced that from 20 September 2024, it will extend eligibility for the existing higher rate of JobSeeker Payment to single recipients with a partial capacity to work of between zero and 14 hours per week.
The higher JobSeeker Payment rate is currently provided to single recipients with dependent children and those aged 55 and over who have been on payment for nine continuous months or more. This measure extends the higher payment rate to those with a partial capacity to work.
The higher JobSeeker Payment rate is currently $833.20 per fortnight (compared to the standard rate for single recipients without dependant children of $771.50 per fortnight).
From 20 March 2025, the existing 25 hour per week participation limit for Carer Payment recipients will be amended to 100 hours over four weeks. The participation limit will no longer capture study, volunteering activities and travel time and will only apply to employment.
The Government has also announced that Carer Payment recipients who exceed the participation limit or their allowable temporary cessation of care days, will have their payments suspended for up to six months instead of cancelled. Recipients will also be able to use single temporary cessation of care days where they exceed the participation limit, rather than the current seven day minimum.
The Government has now announced a new start date of 1 July 2025 for the new Aged Care Act, however no details have yet been provided as to how fees and charges for aged care residents and home care recipients will work under the new Aged Care Act.
Also, the Government has announced it will provide funding over five years from 2023–24 to deliver a range of key aged care reforms and to continue to implement the recommendations from the Royal Commission into Aged Care Quality and Safety. These measures are proposed to include:
The Government has announced it will extend the $20,000 small business instant asset write-off by a further 12 months until 30 June 2025.
Under these rules, small businesses with aggregated annual turnover of less than $10 million will continue to be able to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2025. The Government also confirmed the $20,000 asset threshold will continue to apply on a per asset basis, allowing small businesses to instantly write off multiple assets.
Similar to households, the Government announced it will provide direct energy bill relief for small businesses.
The government will provide additional energy bill relief of $325 to eligible small business in 2024-25. Rebates will automatically be applied to electricity bills and will be rolled out in quarterly instalments.
If you have any questions or would like further clarification in regards to any of the above measures outlined in the 2024-25 Federal Budget, please feel free to book a chat with your adviser.