Weekly recap
What happened in markets
The Australian sharemarket was relatively unchanged last week, with the ASX 200 up just 0.2%, as investors digested lower commodity prices, mixed company reports and stronger economic data. Employment data showed that while the unemployment rate edged up 4.1%, 50,200 jobs were added to the economy, well above the expected 22,500 additions. This labour market strength led market participants to increase the probability of an interest rate increase in the RBA’s August monetary policy meeting (which closed Friday at a 25% probability). Company news included Domino’s (-6.5%) announcement that it will close nearly 10% of its stores in Japan and France, due to poor performance, and that its long-term target of 7,100 stores by 2033 would not be achievable.
US sharemarkets had their worst week since April, broadly down 2.0%, as we saw a shift from big tech and growth stocks toward smaller value companies. We certainly saw a broadening out of performance, as the S&P 500 Equal Weight Index beat the normal market capitalised S&P 500 Index by 1.9%. This was captured in the Cutcher & Neale International Shares Model via the iShares Core S&P 500 Small Cap ETF (2.2%). The market’s rotation was partly triggered by cooler June inflation data and Federal Reserve Chair Jerome Powell’s remark that incoming data had given policymakers more confidence around monetary policy. Company specific news included a global cybersecurity outage on Friday, caused by an update to CrowdStrike’s (-11.1%) Falcon Platform. The outage disabled approximately 8.5 million Windows devices worldwide and was described as one of the most severe cyber incidents in history.
European sharemarkets were also lower last week, as technology related companies weakened amid news of potential US chip export restrictions. Those most affected included semiconductor stocks like ASML (-17.2%) and Infineon Technologies (-8.3%). Meanwhile, European banks outperformed, buoyed by strong earnings signals from US bank company reports and optimism around potential interest rate cuts.
Stock & sector movements
What caught our eye
It has certainly been an eventful few weeks! It all began with the 2024 United States Presidential Debate on 27 June, followed by President Biden's news conference on 11 July. This was then followed by an attempted assassination of former President Trump on 13 July, and culminated with President Biden dropping out of the Presidential race in favour of Vice President Kamala Harris on 21 July.
This sequence of events has led to what we’re calling the “paddling duck” market. On the surface, things appear calm, with the S&P 500 index broadly flat over the past three weeks. However, beneath the surface, there’s been significant volatility as investors try to position themselves for what could be very different outcomes following the US Presidential Election on 5 November.
Having said this, we can’t stress enough the importance of maintaining a diversified portfolio, especially during times of political or geopolitical instability. Unexpected events can occur rapidly, which is why we firmly believe in and manage portfolios that are diversified by company, sector, and country (where applicable).
With this in mind, we have put together a summary of the potential positive and negative outcomes for each political party:
Democratic Presidency
Positives
- Strong focus on green energy initiatives and environmental regulations, boosting the renewable energy sector.
- Healthcare reforms enhancing access and affordability, improving public health outcomes.
- Strengthening social safety nets and labour protections, potentially reducing income inequality.
Negatives
- Increased regulatory oversight raising compliance costs for businesses.
- Potential tax increases impacting after-tax profits.
- Expanding healthcare coverage could lead to higher government spending and possibly higher taxes or budget deficits.
Republican Presidency
Positives
- Deregulation, particularly in energy and environmental policies, reducing operational costs for businesses and boosting economic activity.
- Lower corporate taxes enhancing business profitability and investment.
- Aggressive trade policies potentially protecting domestic industries and improving trade balances.
Negatives
- Easing environmental regulations could harm the environment and public health.
- Reduced labour protections and social safety nets might exacerbate income inequality and social instability.
- Changes in healthcare policies could increase consumer costs.
- More lenient antitrust enforcement might reduce competition, leading to higher prices and less innovation.
Whether the Democratic Party's change in candidate from Biden to Harris will create a more even race against Trump for the Presidency, only time will tell. Regardless, we will continue to ensure that our portfolios are well-diversified and managed with humility, prudence, and a strong focus on risk control.
The week ahead
This coming week in Australia is relatively quiet on the economic data front, with July’s Purchasing Managers Index (PMI) being the only notable release. The reading will give us an update on factory and services sector activity, which was quite soft in June at 47.2 points.
Overseas, the most critical economic datapoints to be released include US GDP and the Core Personal Consumption Expenditure Price Index (PCE). This will tell us if the US’ exceptional resilience continued in second quarter and whether prices continued to trend downward.
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