Market Update – April 2024
Markets have started to see some volatility in April, following (mostly) positive performance over the prior few months. Inflation data continues to improve, although progress appears to have slowed somewhat. Commodity prices continue to keep costs inflated, and there is still no indication of when interest rates will start to be cut.
Is Inflation Under Control?
UK inflation has fallen to 3.2% in March, an improvement on the previous month and a significant reduction from its peak of over 11%. But many economists consider this a disappointing result, given the predicted drop to 3.1%.
The cost of food and other products has slowed to a reasonable level, but motoring and consumer services have continued to rise.
The UK is facing a greater struggle to keep inflation under control than its Eurozone counterparts – both France and Germany have lower inflation rates.
A cut to interest rates is looking less likely as we approach the Bank of England’s May rate-setting meeting, despite political pressure.
US inflation increased to 2.7% in March, while the economy grew more slowly than projected in the first quarter. This has led to an equity sell off and a boost to Treasury bond yields.
Fuel and energy costs have played a significant part in inflationary pressures, and with oil now trading at almost $90 per barrel, the cost-of-living crisis could continue for some time yet.
Commodities and the Economy
As well as oil and energy prices, commodities could be another barrier to bringing inflation under control. Prices of basic goods have fallen sharply in the last couple of years, which has helped to reduce inflation to current levels.
But this appears to have stalled, as the supply of these essential products struggles to keep up with demand. While it is forecast that prices will continue to fall slowly, this is still predicted to leave prices 38% higher than in 2020. Certain products, such as gold, copper, and oil, are expected to continue rising.
Commodity prices will be key in determining how the cost-of-living crisis plays out, as well as any decisions to reduce interest rates.
What’s Next for the Magnificent Seven?
The global market has never been so concentrated as it is today. US Equities now make up more than 70% of the global developed market, with only 10 companies, (all US-based) making up almost 20% of the MSCI All Country World Index. This concentration has more than doubled since 2016 and exceeds the peak tech dominance of the early 2000s.
The Magnificent Seven has become shorthand for market domination. The fortunes of the US stock market, and by extension, the global market, have become fully intertwined with seven tech giants: Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla.
The S&P 500 reached its highest level of inflows from global tracker funds last year. This means that more investors have significant exposure to these companies, whether by design or not.
The earnings of the Magnificent Seven are projected to increase by four times the rate of the other 493 companies in the index. The value of growth-oriented companies hinges on future earnings forecasts. Given the concentration of these companies, there could be significant ripples in the global market if earnings (or earnings forecasts) do not live up to expectations.
The UK Market
The UK market has seen a rally this month, with the UK All Companies sector returning 1.8% and the FTSE 100 growing by 2.7%. This compares favourably to other developed markets, most of which have dipped into negative.
The FTSE 100 closed at an all-time high earlier this month. However, company valuations have been boosted partly on the back of dampened forecasts around rate cuts and a weakened currency.
Additionally, as enthusiasm for (primarily US) tech stocks has faltered slightly, the more ‘value’ based UK market has seen higher inflows.
Although the UK market is still behind the US and Europe over 6 months and longer, it has produced comparable performance over the last three months due to the recent boost outlined above.
Of course, this is a very short-term snapshot. The UK has lagged behind other developed markets for some time now, indicating deeper issues – long-term under-investment, a lack of ‘big tech’ in the market, and the fallout of Brexit have all contributed.
The Global Outlook
Despite strong inflows to the S&P 500, the North American sector has fallen behind in April with a dip of 2.3%. This follows higher-than-expected inflation results which have pushed back the likelihood of an imminent rate cut.
The European sector has also dropped (by 1.2%) in the last month with its performance becoming increasingly correlated with the US. However, business activity has continued to increase, and inflation data is encouraging.
The Asia Pacific sector has seen modest growth of 1.4% in the last month following a difficult few years. This follows a better-than-expected 6.1% boost in Chinese industrial production and a 10% increase in manufacturing investment in the first quarter of the year.
Please don’t hesitate to contact a member of the team for more information on any of the topics covered.
