Monthly economic and market review: October 2024

We may have lost Guy Fawkes as an occasion for a party (and our pets are thankful) but Halloween now seems to be becoming that much more pervasive locally (and our retailers are thankful). The markets also entered into the Halloween "spirit" this year but it ended up being more the case of a horrible trick than a tasty treat. Before we entered into the last day of trading for the month, the local market and the US' S&P 500 were poised for a modest positive close for the month. It was not to be, however, with the JSE losing 1.6% on the day to be down 1.3% for the month and the S&P 500 giving up 1.9% on the day to be down 1.0% for the month (see the chart below). It was disappointing that the markets ended their monthly winning streaks (JSE - 7 months; S&P 500 - 5 months) but they did both record fresh all-time highs during the month. The JSE set a new record level of 87,644 on the 28^th of October while the S&P 500 set its 47^th all-time record high of this year at 5,865 on the 18^th. After the modest market retracements of October, the JSE was left up 11.0% in rands for the year (total return 14.9%) while the S&P 500 index was up 19.6% in dollars in 2024 so far (total return 20.97%).

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

Source: Factset

The markets had a lot to think about in October with the US third quarter earnings season getting underway, global tensions escalating, the policy positioning of central banks and the endless US presidential race rhetoric (or maybe just smack talk). Israel's strikes on Iran, Iraq and Syria raised concerns for oil production very briefly but with Iranian oil facilities left untouched, the oil price closed the month virtually unchanged in the lower seventies (see table below). Gold continued to find favour amongst central banks and investors with the precious metal notching up another all-time high above $2,700/oz during the month.

The broad economic weakness across Europe, with consumer price inflation at the 2.0% target, increased expectations that the European Central Bank ("ECB") will cut rates at a faster pace than its American counterpart. US economic data has been erratic but largely indicative of a labour market and economy in fair shape and not in need of significant monetary policy easing (with headline consumer price inflation at 2.4%). The changing market expectations around the Federal Funds rate were reflected in the US bond market where two-year treasury yields rose 50 basis points in the month and 10-year bond yields rose almost 100 basis points. The "higher for longer" US interest rate scenario supported the US dollar and the greenback appreciated from $1.12/€ to $1.09/€ over the month. Some of that dollar strength and bond weakness could be attributed to the so-called "Trump Trade", with some investors betting on a Trump win that could lead to tax cuts and increased fiscal spending - an expansionary policy that would leave the Federal Reserve more hesitant to cut rates. Locally, 10-year government bond yields rose 50 basis points over the month while the rand lost ground against the stronger dollar but was flat to slightly firmer against the crosses.

The US Federal Reserve announces its next interest rate policy decisions on 7 November and 18 December and market expectations have been trimmed back to a slower 25 basis point cut at each meeting. Longer-term expectations for the target of the Fed Funds rate have also been cut back to between 3.00% and 3.50% (from 5.00% currently). After cutting rates in June and then following that up with two further rates cuts, the ECB is expected to be more aggressive in cutting rates over the next year and that should continue to support the dollar (The ECB has a last announcement for the year on 12 December). The South African Reserve Bank ("SARB") has kept monetary policy restrictive and to date we have only benefitted from the single 25 basis point rate cut in September. Inflation and inflation expectations appear to be well in check and that provides the SARB with sufficient reason to relax policy that much more. Even if the SARB and National Treasury are considering lowering the inflation target range at some point in time, scope to cut rates now still remains. At least 25 basis points of easing are expected from the SARB when they meet for the final time this year on 21 November.

Prices of the platinum group metals (PGMs) were volatile during October with platinum and rhodium finishing the month fairly flat but with palladium closing $100/oz higher. That helped the beleaguered PGM-miners to lead the large capitalisation gainers list on the JSE during the month (see table below). The record gold price also lifted the gold miners to the top of the monthly list with the top eight large capitalisation winners on the JSE all coming from the resources sector. The steadily increasing gold price over the course of 2024 has kept Harmony (+58%) and AngloGold (+39%) in the year-to-date gainers list but Angloplat (-29%), Sibanye (19%) and Northam (-7%) remain amongst the worst performers this year. Despite a modest rally in iron ore prices during October, the bulk commodity's price remains 25% lower than where it started the year. That has hurt Kumba Iron Ore which is the worst performer of the month (-17%) and the second worst performer of the year (-46%). The unwanted title of worst performer of the year currently rests with Sasol which lost 15% in October and is down 47% for the year-to-date. Even with OPEC+ planning to increase production again, oil prices looked to rally amidst the conflict in the Middle East. Supply was not impacted during the month and in an environment of weak global demand, oil prices have been hovering at their weaker levels, limiting any possible advancement in Sasol.

The third quarter earnings season for S&P 500 stocks began in early October and by the end of the month 70% of the 500 companies had reported their financial results. Of those that had reported, 75% reported better-then-expected earnings and 60% of them reported better-than-expected revenue. Amongst the Magnificent Seven, Amazon, Apple, Alphabet, Meta, Microsoft and Tesla all reported better than expected earnings (Nvidia will report late in November). Despite the overall mixed but positive earnings results, companies that missed earnings or revenue expectations or who disappointed in terms of revenue and earnings guidance for future quarters were punished by the market. Thermo Fisher Scientific (TMO) was one such company that lost 12% in the month after reporting a small miss in expected revenue. At a historic price/earnings ratio of 36x earnings, a report of -7% year-on-year growth in earnings was unpalatable for the market. TMO may well have decent longer-term growth prospects but the share price weakness following the results reflected the market's current reticence to pay premium valuations for sub-par earnings growth.

Post month-end it was announced that Nvidia would replace Intel in the Dow Jones Industrial Average index. Nvidia helped its inclusion into the 30-stock price-weighted index with its 10 for one stock split earlier this year but also by its 168% gain this year (and 240% gain last year). In contrast, Intel has failed to keep pace with the AI-led semiconductor revolution and the share has lost 57% this year (after losing 49% in 2022 and gaining 90% in 2023). The index change is slated for 08 November.

Sectors that outperformed the S&P 500 index's negative 1.00% return in October included Financials (+2.55%), Communication Services (+1.80%) and Energy (+0.71%). The underperforming sectors were more prevalent and included Healthcare (-4.73), Materials (-3.55%), Real Estate (-3.41%), Consumer Staples (-2.94%), Consumer Discretionary (-1.57%), Industrials (-1.39%) Utilities (-1.07%) and Technology (-1.0%).

The market has a lot to digest in November with voting in the US presidential election and the second-to-last Federal Reserve Bank policy meeting both falling within the first week of the month. Myriad polls have had the two US presidential candidates neck and neck over the past few weeks but the eventual winner of the popular vote may not even win the presidential prize, based on the workings of the electoral college system. Predicting the winner of the race is difficult and predicting the market's response to the winner is even more difficult. There are many active market bets on the voting outcome but there are also other traders who have opted to square up and stay on the sidelines until the dust has settled. In the short-term there could be increased market volatility as traders and investors adjust to the election outcome, whichever way it goes. The market will also be watching to see which party controls the US Senate post the election and how that will impact law-making over the next four years.

Apart from having a significant impact on the politics of the globe, the economic policies of the 47^th president of the Unites States will have a longer-term bearing on stock markets as those policies have the potential to impact the corporate earnings that ultimately determine the longer term course of markets. The S&P 500 stocks are currently forecast to report annual earnings growth of 9.3% this year from revenue growth of 5.0%. A modest pickup in the pace of revenue growth next year (+5.7%) is forecast to result in earnings growth of 15.1% (see table below) and that should continue to provide a fundamental underpin to the equity market for as long as valuations do not run ahead of themselves. For now though, we are all going to be focused on the blue and red maps of the US on our screens as election results trickle in. For the sanity and safety of the globe, let us hope that the next US president has a greater inclination to treat than to trick.

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