A summary of the latest trends in the markets (April 2024)
Snapshot of the economic and market update for the second quarter of 2024
2024 has started off on a positive note for global markets, especially for global equities which are up 8% to start the year. Performance has been particularly strong in Japan, up almost 20% and the U.S. up over 10%. But across the world we have seen all-time highs for stock markets: in Japan for the first time in over 30 years, but also the U.S., Germany, and France. In fixed income, the volatility has continued, with global bonds down about 2% to start the year, but corporate credit has done better, with U.S. high yield up 2%.
Following on the positive last quarter of 2023, the same drivers continued to power risk assets higher:
1. The economic data in the U.S. continues to be strong, giving investors even more conviction on a soft landing this year: one in which economic growth remains resilient, while inflation continues its journey towards 2% as the year progresses. Overseas, the data seems to be bottoming in Europe and China as well. This is a positive backdrop for corporate earnings – and hence equities and credit.
2. Central banks in developed markets are getting ready to cut interest rates, as they gain more confidence that disinflation continues and start focusing more on their role to ensure the economic cycle continues. The short-term focus is on when exactly the first rate cut occurs, which has kept volatility elevated in the yield curve – but in March, central banks like the Fed, ECB, and Bank of England left open the door for cuts to begin in June. Looking longer-term, knowing that the last rate hike is behind us means a more supportive environment for fixed income.
3. Powerful non-economy related investment themes continue to be a key force behind the rally in global equities. For the U.S., the AI theme continues to dominate – but the interesting development this year has been the broadening out of the winners of this theme beyond the “Magnificent 7” (or the 7 largest companies). For Europe, AI has also benefited some companies, but also themes like health care and luxury goods. And for Japan, the enthusiasm around corporate reforms has continued to excite investors.
Looking ahead, the economic and earnings outlook continues to look supportive; however, risks remain such as geopolitical tensions, many global elections, and more. As a result, a focus on quality and active management is important to separate the winners from the losers. Most importantly, as last year showed, markets do not go up in a straight line, but there is never a perfect environment in which to get invested. There is a real investment cost of holding to much cash and being uninvested: last year, a diversified portfolio of global stocks and bonds outperformed cash by 3x and so far this year the same is happening. Going forward, as rate cuts loom already in the next few months, the cost of holding too much cash will only increase.
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