Market commentary - August 2024

Share markets endured a significant bout of volatility in August amid worries about a US recession and the implications of a sharply strengthening Japanese yen. As the month progressed fears subsided, with some more supportive data and some soothing words from Chair of the Federal Reserve, Jerome Powell. Overall, the summer blues brightened into the month end and losses were pared.

Sharp shock then rebound

It’s not unusual for sharp drops to occur in markets. The global stock market has fallen by 10% during a calendar year more often than not: According to Schroders it has happened in 30 of the 52 calendar years prior to 2024. More challenging perhaps for investors is that markets tend to ‘climb up the stairs but take the elevator down’, a pattern is that always unnerving.

It’s also important to keep the recent bout of volatility in context. Markets are still strongly up year to date. Share markets have rallied strongly over the last two years, with indices in the UK, US, Europe and Japan all hitting record highs this year. Tech stocks were also due a healthy correction and there is now a sense that some froth has been blown off the top.

It’s also not unusual for extra volatility to happen in the summer amid thin trading volumes. Reassuringly, the market action since the setback suggests that on this occasion it was primarily a more ‘technical’ market move resulting from of lots of investors being caught out on the wrong side of a ‘carry trade’.

Read more: Fear of a US recession is overdone | How to survive market volatility

A flash in Japan?

The proximate cause of the volatility was the Bank of Japan’s (BoJ’s) surprise interest rate hike from 0.1% to 0.25%. Although a small move, it had a dramatic impact on the yen which rallied sharply against major currencies.

For some time, some global investors have relied on a falling yen, borrowing at very low interest in the currency to buy assets offering a better yield. With US interest rate expectations simultaneously receding on a weak employment reading, a sudden unwinding of this carry trade took place. This prompted a dramatic selling of Japanese stocks, which at one point fell 20% before mounting a comeback.

Japanese shares had seen significant inflows thanks to moves from the Tokyo Stock Exchange to push companies to pursue shareholder friendly policies such as more efficient balance sheets. The sudden volatility will have caught some out, but some Japanese funds took advantage of the volatility and rose in value over the course of the month. The ripples now appear to have subsided, although there may be longer term implications of strengthening yen within Japan and beyond.

Read more: Investing in Japan: what’s the market outlook?

Fed calms investor nerves

There was better news for investors as the month progressed. Speaking at Jackson Hole, the annual central bankers’ shindig in Wyoming, Jerome Powell, sent clear signals that the Fed stands ready to cut interest rates. He remarked that “time has come” for policy easing, acknowledging the easing labour market could convince the rate-setting committee that interest rates need to become less restrictive more quickly.

This helped ease market worries that persistent high interest rates might cause a recession in the world’s largest economy. Chair Powell noted there is an “unmistakeable” cooling in the labour market, adding that policymakers had “ample room” to respond to further deterioration. However, he stressed the timing and pace of cuts would hinge on “incoming data, the evolving outlook and the balance of risks.”

Accordingly, markets moved to price in a substantial number of rate cuts by the year end, which helped resuscitate a range of assets.

A mixed picture

Alongside Japanese shares, other more economically sensitive areas suffered in the wake of more negative sentiments around economic growth in the US and beyond. Energy stocks and US smaller companies were weak, for instance.

The latter also suffered in the wake of an unwinding of the so-called ‘Trump trade’. This is where extra trade tariffs and more ‘reshoring’ of operations are seen to potentially benefit many small and mid-sized companies should the ex-President return to the Whitehouse. With Democrat nominee Kamala Harris making a stronger showing in the polls, the odds of a Trump victory, particularly an overwhelming one where Republicans take both Houses of Congress, have faded.

Meanwhile, there were mixed results in the tech sector. Nvidia produced very strong earnings numbers and forecasts, but shares fell back regardless suggesting many investors were expecting something even more blockbuster.

Elsewhere, the downbeat news from China also continued. Adding to recent disappointing economic data, the weakness of the Chinese consumer was revealed by poor results from e-commerce giant Pinduoduo, better known in the West for its Temu brand. In the UK, progress in the FTSE 100 was hampered by a stronger pound, as well as weak performance among commodity stocks on growth concerns. However, it still moved close to all-time highs by the month end. Meanwhile, medium-sized and smaller company stocks were also impacted by investors’ aversion to economically sensitive areas.

Other areas were more stable with little contagion. Bonds were resilient, underlining their benefits of diversification in a portfolio. More specifically, high quality bonds offer some protection from a more negative economic scenario where interest rates need to be cut faster or further than widely supposed. Even if that doesn’t come to pass, they stand to lend stability thanks the good levels of income on offer, albeit a scenario of persistent higher inflation would not favour them.

A glittering performance

Gold continued its standout performance this year, hitting a fresh high topping the $25 an ounce mark. It meant a standard gold bar, weighing 400 troy ounces, hit the $1m mark for the first time. Gold prices have shot up more than 20% year to date driven by several factors: The less settled geopolitical climate, central bank buying economic and fiscal uncertainty, and now the prospect of falling interest rate expectations which increases the appeal of gold versus assets that produce interest or income.

Funds investing in gold shares followed suit over the month, although their record of keeping up with gold is patchy. High borrowing and operational costs have affected some mining companies, but if these subside then they may start to do a better job of more fully reflecting the rise in the price of bullion.

Follow the link to explore the top performing funds and sectors in August 2024.

Top performing funds and sectors