Investment Newsletter – June 2024
Money markets are currently pricing in 51bps of easing throughout the year-end, which implies two fully priced rate cuts. The first cut is fully priced by November, but 20bps of easing is priced by the September meeting, which implies an 80% probability of the first cut taking place in September. The dovish pricing has been driven by the soft May inflation reports (CPI, PPI and PCE), as well as a considerably cooler labour market, including commentary from Powell on resumption of the disinflation and a dismal ISM Services PMI. Another cool CPI print could see markets start to fully price, or nearly fully price a September cut but a July cut is largely ruled out and thus pricing for this is unlikely to change much. With two rate cuts fully priced for 2024, markets are currently more dovish than the latest FOMC dot plots with the markets focusing on the data rather than Fed guidance. Nonetheless, although the Median is for one cut in 2024, there are still eight members on the FOMC who pencilled in two rate cuts. Seven pencilled in just one rate cut, but the median was skewed higher with four hawks pencilling in no rate cuts this year.
Analysts remain optimistic about earnings even with economic growth weakening, inflation remaining elevated, and liquidity declining. However, despite the decline in Q2 earnings estimates, analysts still believe that the first quarter of 2023 marked the bottom for the earnings decline. Again, this is despite the Fed rate hikes and tighter bank lending standards that will act to slow economic growth.
If re-elected in November, Donald Trump would be the only president besides Grover Cleveland to serve two non-consecutive terms in the White House. For investors, Cleveland would not be an auspicious precedent. During his first term, the US equity market returned 43%, but Cleveland’s second term started with the Panic of 1893 and an equity drawdown of 27%, ending with a four-year total return of -4%.
Animal spirits could also create a tailwind for stocks exposed to small business activity if Trump wins. Around the five presidential elections of the last 20 years, CEO confidence, consumer sentiment, and particularly small business optimism have shifted more favourably in response to Republican victories than Democratic victories. To the extent improved sentiment leads to an increase in spending and investment, a Trump victory could boost the earnings outlooks for some firms even without substantial policy changes.
The Third Plenum in China, an event held roughly once every five years where major economic and political changes are announced, will offer investors clues on Beijing’s direction with regard to markets and the economy. A sluggish macro picture and rising geopolitical challenges weigh in the backdrop. However, this meeting along with earnings progress should help catalyze an expansion in valuations. That said, the Chinese equity market would probably rise significantly in the coming months, if the leadership can deliver on reforms that enhance market mechanisms, boost private enterprise and offer stable and transparent regulation.
