Market commentary - May 2024

It was a relatively strong month for many share markets in May, building on an overall positive start to 2024. In the UK, the snap announcement of a general election for 4th July didn’t move indices significantly. Both major parties are perceived as relatively close on economic matters, and bookmakers’ odds have pointed to an overwhelming Labour victory for a long time.

Inflation data continued to cause ripples, though. The UK CPI annual rate fell to 2.3% in April, within touching distance of the Bank of England’s 2% target, but many economists had predicted a lower figure, some even under the 2% level. More worryingly, core inflation which strips out volatile food and energy prices remained stubborn at 3.9%, and services inflation only cooled a little to 5.9% year on year.

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When will UK interest rates be cut?

Recent data will prompt some fierce debate among members of the BoE’s Monetary Policy Committee (MPC) that decide UK interest rates. Inflation, led by robust wage rises, could remain sticky through the summer months but other economic numbers such as retail sales are showing signs of weakening following a good start to the year. Overall, markets have already decided a June cut to the current 5.25% level is off the table, not least because that’s now immediately ahead of the general election, meaning the earliest the BoE is likely to act is August.

UK gilts were down over the course of May amid the disappointment that expected interest rate cuts will now take longer to materialise, and some other interest rate sensitive areas were under pressure. Bond prices have been choppy all year so far as expectations for lower rates have been pared back since the optimism at the end of 2023.

The decline in US inflation has likewise stalled in recent months, highlighting that the last mile to 2% inflation is going to be tough for the Federal Reserve too. Unlike the UK and Europe, the US economy has been growing well and consumer confidence appears upbeat for now. Although goods price inflation has fallen way, services inflation, again propelled by labour costs, is pushing overall inflation numbers up.

There are compelling reasons to believe the battle with inflation will be won and that high rates will ultimately take their toll. Job confidence is waning, and new openings are in decline. However, it’s apparent that rate cuts will be small and limited compared to their rapid ascent to the current level.

Read more: Markets shrug off general election

Can the tech rally continue?

While interest rate expectations continued to dominate sentiment in share markets, containing broader rises, a few areas and individual stocks shone through. Strong earnings from chip maker and bellwether stock Nvidia helped propel the tech sector and broader US markets with AI optimism. The Nasdaq index closed above 17,000 for the first time. However, other areas were more subdued.

Increasingly, there is more dispersion in individual stocks with the so-called Magnificent Seven a case in point. Shares in Nvidia and Microsoft have carried on making new highs while Tesla and Apple have fallen away, emulating the characters of the classic western where only three of seven protagonists survive. There’s nothing as dramatic about the relative performance of the seven tech enabled companies of course, but our suspected trend of greater dispersion in fortunes is intact. Given these are very different companies in very different markets this is only logical, and we expect divergences to persist.

Read more: US market review: what are the prospects for investors?

Will the FTSE makes new highs?

The UK FTSE 100 set several new highs during May. Despite giving back some of its gains into the month end it stayed convincingly above the key 8,000 level. It was also a particularly strong month for UK smaller companies having languished for some time.

The upturn in the UK market has caught some investors off guard, but really it has been a while coming. It has long been cheap, both versus other markets and its own history. What it lacked was a catalyst to break through the prevailing negative sentiment and reverse the flows out of UK assets that had been depressing share prices and holding the FTSE back.

Gradually, things appear to be turning. Helpfully, the performance of the UK economy has perked up a little, to the surprise of some commentators. The numbers are still not great, perhaps, but they are better than feared, which is what matters. When things seem very negative, a bit of good news goes a long way. There’s also been some positive trends at a company level. The big international earners in the FTSE 100 have benefitted from strength in the US dollar, which increases their earnings when measured in pounds, and overall company results have been pleasing. Some of the FTSE’s big sector constituents such as energy and mining, as well as defence, have been doing well.

Meanwhile, we the green shoots of increased merger and acquisition activity have started appearing. This is where a company or investor approaches another company to buy it, and typically offers a premium over the prevailing share price. The cheapness of UK shares has ushered in a series of these approaches, which creates a halo effect across the market, not just in the target business itself. It all adds to the feel-good effect, highlighting to investors the cheapness of the UK market and perhaps reinvigorating the interest of investors that had previously dismissed it.

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Please note: the value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable indicator of future returns.