Monthly economic and market review: July 2024

Record market highs were the order of the day in July as interest rate cuts drew ever closer and as the second quarter earnings reporting season in the US got underway. The month was marked by something of a changing of the guard as Labour trounced the Conservatives in the UK, Macron's Ensemble coalition came second in the French elections and Biden stepped down from the US presidential race. The markets largely ignored the politics though and were buoyed by the prospects of lower interest rates to come. The European Central Bank ("ECB") cut rates for the first time in June but as expected, didn't cut again at their July meeting. The ECB next gathers in September and a further rate cut has been priced in for that meeting. The Federal Reserve Bank was not expected to cut rates at their 31 July meeting either but the more dovish tone from the central bank has led the market to fully price in a first rate cut in September. The Bank of Japan bucked the trend with a second hike in interest rates at the end of the month (from 0.1% to 0.25%) but Japan has been on its own decades-long battle with deflation and a zero-interest rate policy.

The monetary policy easing stars also began aligning at the South African Reserve Bank where two of the six Monetary Policy Committee ("MPC") members voted for a 25 basis points ("bp") cut in the repo rate at the 18 July meeting. With the MPC expecting inflation to be at or below the midpoint of the 3-6% target range at least until end-2025 and with improving general inflation expectations, the door has opened for a first interest rate cut from the SARB at their 19 September meeting. While most of the globe is entertaining the prospect of cheaper money, the expectation is not for a deep and quick rate-cutting spree. In the US where the target for the Fed Funds rate was raised from 0.25% in March 2022 to 5.50% in July 2023, the market is pricing in a 2025 year-end rate of around 3.75%. Nevertheless, the excitement towards prospective monetary policy easing is growing and this was very evident in the bond markets. In the US, the 2-year Treasury yield fell 46bp from 4.72% to 4.26% while the 10-year yield fell 32bp from 4.37% to 4.05%. Not to be outdone, the yield on the R2032, the South African government bond maturing in eight years' time, dipped 32bp from 10.70% to 10.16%. These rates are all closer to those that prevailed at the start of the year when rate cut expectations were similarly high (see table below).

The equity markets took heart from the expected interest rate pivot and the S&P 500 in the US made a new all-time high on 16 July of 5,667 index points. It then slipped back to a close of 5,522 points to be up 1.1% for the month (see green line in the chart below). That sixth positive month out of seven in 2024 left the S&P 500 index up 15.8% for the year. Factoring in dividends, the total return for the S&P 500 for the seven months of 2024 was 16.7%. The FTSE/JSE All Share index started the year with two negative months but strung five consecutive positive months together to be up 7.6% for the year-to-date (the blue line in the chart below). The market rally on the last day of the month and the overall 3.8% gain in July lifted the local bourse to an all-time closing high on 31 July of 82,765 index points. Adding dividends earned to the 7.6% capital return bumps the total return up to 9.9% for the period.

FTSE/JSE All Share index (blue, RHS) and S&P 500 index (green, LHS): 12 months to 31 July 24

Source: Factset

There weren't any dramatic currency shifts in the month and the modest weakness of the US dollar against the euro in the month ($1.07/€ to $1.08/€) helped the rand to a modest gain against the dollar (R18.19/$ from R18.26/$). The rand was, however, very slightly weaker against the euro and the pound in July. The prospect of lower interest rates helped lift the gold price to an all-time high of $2,480/oz mid-month before ending July slightly lower at $2426/oz (up 16.7% for the year-to-date). With the geared play to the gold price that the gold mining companies represent, it was no surprise to see Gold Fields (+16.7%) and AngloGold Ashanti (+13.7%) amongst the big winners in the month. Harmony (+48.9%) and AngloGold (+47.9%) top the gainers list for the year to date.

Diversified miner South32 was excluded from the S&P/ASX indices at the end of June and fell in a heap during July (-16.6%). The company advised investors that it would take a $554m impairment charge after the conditions imposed by the Western Australian Environmental Protection Authority effectively scuppered the company's Worsley Mine Development Project. Quarterly results were released on 22 July but by then the share had fallen from R48.38 to R36.50. Outside of gold, the slowing global economy, and specifically the slowing Chinese economy, lowered the demand for resources and materials and the consequent fall in prices left many of the commodity counters on the losers list for 2024.

On the offshore markets, the trading month of July was marked by something of a rotation out of the larger capitalisation technology and growth stocks (that had performed so well this year) into more value-orientated and smaller capitalisation stocks. The equal-weighted S&P 500 index, which ignores company size, returned 4.5% in the month to outperform the market capitalisation-weighted S&P 500's return of 1.1%. The mega-capitalisation technology stocks have been on a tear over the past year and while much is still expected from the sector in terms of future earnings growth, the market darlings took a breather during the month. Amongst the top 20 monthly losers in the table below are Magnificent Seven stalwarts Microsoft (-6.4%), Meta Platforms (-5.8%), Alphabet (-5.6%) and Nvidia (-5.3%). The market-driving semiconductor and artificial intelligence theme of the past year was put on the back burner in the month and Micron (-16.5%), Lam Research (-13.5%), AMD (-10.9%), Applied Materials (-10.1%), Qualcomm (-9.2%) and Synopsis (-6.2%) were all significant underperformers.

Tesla (+17.3%) had a good month after posting results that beat on revenue but missed on earnings. The poor performance of Tesla in recent months had many investors excommunicating the counter from the Magnificent Seven club but those who stayed the course were rewarded in the shorter-term. RTX Corp (+17.0%) also had a strong run after posting robust sales numbers in their quarterly earnings report. The sectors that underperformed the S&P 500 index's positive 1.1% return in July included Communication Services (-4.16%) - helped lower by Alphabet and Meta - and Technology (-2.1%). Investors in technology stocks are accustomed to the ongoing and significant capital expenditure in these companies but have increasingly begun questioning the magnitude and timing of the monetisation of new technologies and the return on the capital invested. Outperforming sectors in the month included Real Estate (+7.11%), Utilities (+6.73%), Financials (+6.31%), Industrials (+4.84%), Materials (+4.31%), Healthcare (+2.49%), Energy (+2.03%), Consumer Staples (+1.77%) and Consumer Discretionary (+1.64%).

By the end of the month, the second quarter earnings season in the US was in full swing. Just under half of the S&P 500 companies had reported results with overall top line revenue up 5% and bottom line earnings up almost 10%. The table below reflects the earnings and revenue growth forecasts for the coming quarters and the 2024 and 2025 calendar years. Lower inflation and lower interest rates are expected to support earnings growth out into 2025 and support further market gains but shorter-term uncertainties around both the US and the Chinese growth outlook do pose a downside risk to those earnings forecasts.

If Mark Twain was an investment analyst, he might have written that the reports of the death of tech are greatly exaggerated but he would have agreed that in the markets in July, tech was bad and everything else was good.

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