Second Quarter 2024 Review & Outlook

Executive Summary

A good year so far. Early part of the year saw Equities grow at their fastest rate in 5 years
Initially, led by Tech and communications services
But also, Financial and Energy sectors demonstrating the breadth of this Bull Market
The outlook for the remainder of 2024 remains strong. We continue to expect growth for the remainder of the year although at a much-reduced rate
Investment sentiment continues to improve as the scepticism of the existence of a Bull (rising) market reduces.
We are, however, wary of a “Correction”. These are common in a Bull market, causing the market to suddenly fall and recover, by 10% – 20% within a short period.
Our conclusion is that we are in a Bull Market in which shares will rise

2024 Performance to date

Markets go in a cycle from Bull market to Bear market and then back to Bull market (rise, fall, rise) and we are in a (rising) Bull market. The early part of the year has seen Equities grow at their fastest rate for the last 5 years.

Initially, this growth was led by Tech and Communications Services companies because of the future benefits that would arise from Artificial Intelligence (AI), but the Financial and Energy sectors have also shown above average growth, demonstrating that the breadth of this Bull Market was wider than just Tech. The chart below shows the returns achieved by different sectors during the early part of 2024:

2024 Market Outlook

The market outlook for the remainder of 2024 is good.

Investors have now reached the conclusion that the Bull market is not just AI pushing the US Magnificent 7 (Apple, Microsoft, Nvidia, Meta Amazon, Alphabet and Tesla) higher and higher but a more broader Bull market. In the early part of 2024, Equity Indexes have hit all-time highs in many developed countries (Australia, Denmark, France, Germany Ireland Italy, Japan Netherlands and Spain). Investor sentiment has therefore brightened from pessimistic to Optimistic. We are in the early Optimism stage of the market cycle

Although there remain several investor fears (Wars, sticky inflation, elections, the market rising too far too fast etc.), they are reducing as their fears fail to materialise (i.e. the lack of the forecast deep recessions). Investment sentiment has therefore moved from Pessimistic to Optimistic.

Reviewing the data, the broader trends are also positive, and the environment looks healthy:

Stocks are thriving despite higher interest rates
US GDP has also strengthened despite the Federal Reserve hiking interest rates
Many economic indicators are positive:
- Consumer spending
- US Industrial production
- The Purchasing Manager indexes – businesses are stocking up and splashing out on new equipment
- Factory Orders
- GDP growth
- Increase in business investment
The Inflation rate has fallen (2.0% UK, 3.27% US and 2.7% EU)
Interest rates are expected to fall once the central banks are comfortable that inflation is under control. At present the markets are pricing in two rate reduction by the Bank of England in 2024, the first being in September. The US market is expecting one rate cut by the Federal reserve, and all are forecasting more cuts in 2025.
These indicators bode well for the remainder of 2024

2024 is also a very busy year for elections, worldwide, and this is usually good for markets:

In most instances, Elections cause political gridlock as no legislation is passed whilst politician are trying to get elected. The risk that detrimental legislation will be passed is therefore low – Legislation risk is low, and certainty is good for the markets.

Markets price in all known information and both US candidates, Trump and Biden, are well known and the UK election result is likely to be a Labour government. Barring a surprise US candidate or a Labour loss, we are not expecting the outcome to have an impact on Equities. The gridlock of no legislation is likely to be beneficial and the markets have already priced in the impacts of the results

Elections will therefore only impact markets when they generate a surprise – President Macron calling elections in France, caused volatility. Even so, the impact was short lived as it was quickly priced into the market.

Passed results show the different UK parties have little difference on equity values:

With elections gridlocks, increasing sentiment and positive economic data we feel there is still more room for growth, and we expect a strong end to the year, albeit at a lower growth rate.

Clients should note, however, there is always a chance of a Correction – a sudden drop of 10% to 20% which can happen at any time and for any reason. This is usually caused when the market is surprised and therefore any fall will be quickly recovered.

Beyond 2024

As reported previously, the 2022 Bear market was typical, lasting less than 2 years, and the average time of a Bull market is 5 years. The new Bull market has been typical so far, with a surge from the 2022 low as those equities that had fallen the most, bounce back the highest. On balance our expectation is that 2025 should also be a positive year for Equities

Against this we have the regular worry of the unknown, large shocks that come out of nowhere (Covid) and are large enough to derail the Bull market. These cannot be planned for, but we remain vigilant for these events

Historical comparison also makes us guarded. The chart below shows a comparison between the recoveries from the 1966 and the 2022 Bear markets. The trends are the same:

1966 saw a shallow bear market. It was a mid-term year for the US President, with high inflation, war fears and dour investor sentiment.

A new Bull market started in October as inflation eased in the US and then the UK and markets boomed in 1967 and 1968. Sound familiar? 1966 – 1968 has been mirrored almost perfectly in 2023. The concern is that 1969 saw a Bear market and if the comparison holds 2025 could be a Bear Market.

There are differences, however, so that, on balance, we believe 2025 should see the continuation of the Bull market

Our Conclusion

Our conclusion is that we are at the Optimistic stage of a Bull market and there is still more room for growth. Markets are behaving as expected and our forecast for a strong 2024 is coming to fruition.

We look to see when investor sentiment moves from Optimistic to Euphoria which typically leads to a Bear market but there are no signs at present. All known risks are priced into the market, so barring surprises or a Correction we expect the remainder of the year to be positive.