Greed is back – Damien’s Market Update – May 2024

Welcome to the latest episode of my monthly YouTube show where I discuss what is happening in investment markets and what to look out for. In this episode, I explain how optimism has returned to markets in May with potential rate cuts, declining inflation and the easing of geopolitical tensions key factors for the latest market rallies.

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Abridged transcript - Damien's Market Update - May 2024

In April there were signs that equity investors were rethinking their narrative and fear was starting to drive investor behaviour. We started to see rotations out of sectors that had performed well in January and February into previously lagging ones, such as energy. European and UK stock markets outperformed those in the US, contrasting with earlier in the year.

While rotations aren't necessarily bad for a bull market, it was notable that equity investors began favoring more defensive sectors as April progressed. For instance, the S&P 500 sector performance in April showed utilities as the only sector with a positive return of 1.66%. Other defensive sectors like Consumer Staples (-1.13%) outperformed more cyclical ones like Consumer Discretionary (-4.5%).

Tech stocks slumped, with earnings from some Magnificent 7 members, particularly Meta, failing to improve the situation. Consequently, the S&P 500 fell over 4% during April. 

However, it wasn't a complete disaster. Diverging interest rate expectations among central banks, with the Bank of England and the European Central Bank deemed most likely to cut rates before the US Federal Reserve and the Bank of Japan, influenced currency and equity markets. This divergence meant stock markets with more accommodative central banks performed better.

For example, in April, the FTSE 100 outperformed (finishing the month up 2.41%), while US and Japanese markets lagged behind the UK and European markets. Gold was also a standout performer for much of the month.

The good news is that in May global stock markets appear to have turned a corner. Firstly, reduced geopolitical tensions after the US urged Israel to agree to a ceasefire with Hamas helped boost sentiment. Then after the Bank of England announced that the Monetary Policy Committee voted to keep the base rate at 5.25% the meeting minutes revealed a split vote, with seven members voting to maintain the rate and two voting for a 0.25% cut. This hinted at potential rate cuts soon, buoying UK equities. Governor Andrew Bailey expressed optimism about the economy's direction, and the market now anticipates the first BOE rate cut as early as August. 

US equities have also performed well in May, driven by weaker-than-expected employment figures at the start of the month, also fueling hopes for looser monetary policy. In addition, the latest US inflation data, released on May 18th, reinforced the belief that the US is making progress in its inflation battle. The Consumer Price Index (CPI) for April showed a 3.4% year-on-year increase, slightly down from March's 3.5%, and in line with economists’ expectations. This optimism boosted investor confidence further, particularly in US tech stocks. 

Even the Magnificent 7 are shining brightly once again after a disappointing period during April, helping to propel the Nasdaq 100 and the S&P 500 to new all-time highs, The Dow Jones also set its own record last week. Similarly, the FTSE 100 has set a new all-time high, with an even more impressive breakout.

It all means that currently investors are in a sweet spot where optimism over corporate earnings, anticipated rate cuts, declining inflation, and easing geopolitical tensions are driving rallies across various asset classes. The 10-year US treasury yield has dropped from 4.7% to 4.4%, reflecting a broader bond rally, and gold prices have returned to their all-time highs. Unsurprisingly, my own £50k portfolio reached a new all-time high this week.

However, a potential risk looms this week with Nvidia's Q1 earnings report on Wednesday. Investors view Nvidia results as a key indicator of the sustainability of the broader stock market rally as well as the AI theme. Since November 2023, Nvidia has contributed  roughly 15% of the S&P 500's gains, more than any other company. In April investors were in the grip of fear, but in May they are being driven by greed.

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