July 2024 saw volatility tick up and geopolitical tensions rise
Internationally, July was an interesting month with an assassination attempt on Trump, Biden dropping out of the election race and escalating tension in the Middle East. SA’s improved economic backdrop has resulted in positive sentiment.
Introduction
July has been a volatile month for markets led by some sharp moves in the technology space. In addition the political landscape has shifted in the US with President Biden dropping out of the 2024 election race. Tension in the Middle East is escalating following Israeli strikes in Beirut, Lebanon and the killing of the Hamas leader, Ismail Haniyeh in Iran. This has all resulted in additional uncertainty and in turn the market volatility gauge (VIX) has ticked up.
July saw the start of earnings season with the market expecting earnings growth of 8.9%. The main theme and focus remains on AI and the monetisation thereof. Outside of technology, markets are looking to unpack the resilience of the US consumer and whether the aggressive rate hikes are having a significant impact on spend. In addition markets saw a rotation out of technology and into small caps which saw the Russell 2000 having a strong run and outpacing the Nasdaq although these rotation dynamics appear to be easing.
From a macro perspective the disinflationary trend remained largely on course and the labour market showed some additional weakness which called for some Fed Commentators to indicate that cutting rates shouldn’t be left too late. The Fed meeting which ended on 31 July resulted in rates remaining on hold as expected.
The new UK Chancellor (Reeves) disclosed a Government funding shortfall of greater than GBP20bn which she blames on the previous administration and has setup the country for tax increases later in the year.
Locally there is some initial positive sentiment as expectations are for improved service delivery and in turn the chance of a better economic backdrop. This in addition to more than 100 days without load shedding sets the stage for much better GDP growth in 2024. There remains a lot of noise around the GNU and this is not expected to change; however, the country now needs to see work in action and so far cutting through the noise it does appear that things are moving in the right direction albeit slowly.
On a lighter note, July saw the start to the 2024 Olympics in Paris which is a great opportunity for athletes from a variety of disciplines show their skills and it has been positive to see South Africa surprised on the upside with already achieving one gold and two bronze medals.
Macro Environment
On the 13th of July at a rally in Pennsylvania there was an assassination attempt on Donald Trump which fortunately only resulted in a minor injury to his ear but resulted in further support behind the former President and the Republican nominee for the 2024 election. The Political landscape in the US saw a further significant shift as President Biden dropped out the race and pledged his support for current Vice President Kamala Harris to be the Democratic nominee. A number of Democratic heavyweights, such as the Obamas, have also pledged their support for the current VP. Current polling shows Trump slightly ahead in most polls although some polling has shown Harris pull ahead. Trump has named his VP running mate as JD Vance who many see as a younger version of Trump with very similar ideologies. Kamala Harris is yet to announce her VP running mate but there is no doubt the US election landscape is heating up and markets are paying more attention as we move closer to November.
The Middle East conflict has seen increased tension following a double Israeli strike which killed a senior Hezbollah commander in Beirut and then hours later Hamas political leader, Ismail Haniyeh, was killed in Tehran. This follows Israel blaming Hezbollah for the strike on a football field in the Golan heights which left 12 young people dead. Not only is the loss of life devastating but markets are nervous that escalations could result in an all out war which would end up drawing in the US and Iran and completely shift the global landscape. The price of oil is moving up in response to this and we will be watching this space closely hoping cool heads prevail.
The FOMC meeting ending on 31 July saw rates remaining unchanged which was expected and although there was no explicit signal for a September rate cut, the policy statement was definitely more dovish. Powell’s comments noted rate cuts could be on the table for September but he also noted he can see a scenario with no rate cuts this year. The chart below highlights the current forecast outlook.
Asset Allocation
Our local asset allocation has remained unchanged although we have looked to increase SA Inc. exposure on a select basis. Our offshore asset allocation saw a slight down-weighting of equity with a focus on technology exposure that had become overweight and sat with lofty valuations. Our bond positioning remained unchanged and we continue to roll our structured notes exposure to ensure clients weightings remain in line with the house view. Overall we are happy with the changes made as they seek to balance risk and reward.
Market Performance
July was a good month for local markets with some weakness offshore but still positive. During the month of July, the S&P500 ended up 1.13%. The MSCI World index was up 1.19% for the month and the JSE saw a positive return of 3.84%. As per chart below the YTD performance of the JSE is up 7.64% (in ZAR), while the S&P500 is up 15.78% and the World index is up 13.82% (in USD), respectively.
Bonds
Bonds have seen a bit of movement between the 2Y and the 10Y as a number of traders have been positioning for what is seen as a Trump Presidency trade. The view is that the policies that Trump is looking to implement will likely result in longer term rates sitting higher and in turn the spread between the 2Y and 10Y closed quite significantly in July. This spread is seen as one of the key measures of the inverted yield curve and shrunk to a differential of 13bps to retrace back to around 20bps at month end. A Year ago this spread was sitting at 90bps so as per the charts below there has been quite a lot of movement in the bond market.
Equities
Earnings season has started with the market setting lofty expectations especially for technology and AI. According to Factset’s latest Earnings Insights report, 41% of the S&P500 companies have reported to date and the blended earnings growth rate sits at 9.8% which is ahead of the 8.9% expected. Blended revenue growth sits at 5% and 78% of companies have beaten EPS expectations, which is just above the 5 year average. The main discussion point has focused around the capex spend by some of the big tech companies and whether this is turning into earnings. To date both Google and Microsoft produced good results but disappointed the market with increased capex spend that has not turned into earnings yet.
In addition to a focus on earnings, markets are seeing a rotational shift from big tech to smaller caps as there is anticipation of rate cuts benefitting smaller caps and hence there has been repositioning by a number of participants. As can be seen by the chart below this is reflected in the strong performance of the Russell 2000 (+10.10%) versus the Nasdaq 100 (-1.63%) during the month of July.
Conclusion
Seasonality would normally indicate July being a good month for markets but lofty valuations combined with high earnings expectation have seen some price pressure coming through. A more uncertain macro environment with increased geopolitical tensions has seen volatility tick up. Earlier in July we proactively managed the risk within portfolios which has assisted in weathering some of this volatility. August tends to be a quieter month in offshore markets as it is the last month of Summer and hence a number of participants go on vacation. This being said we still have earnings from a number of bellwether stocks such as Apple, Amazon and Nvidia which we will be watching closely. The team is available should clients wish to discuss current positioning and outlook for the remainder of the year.