Snapshot
Global financial markets finished 3.8% higher in May, recovering losses sustained during April, following dovish commentary by the US Federal Reserve (Fed) and softer-than-expected inflation in the United States. Expectations for corporate profits also continued to rise, particularly in the United States, thereby supporting share prices.
Volatility fell by 17.4% in response, as measured by the CBOE Volatility or VIX index, from 15.65 down to 12.92, after peaking at 19.23 in mid-April. Bond yields in the United States also fell as the market anticipated lower future interest rates, with the 2-Year Government Bond yield falling from 5.03% to 4.87%, and the 10-Year Government Bond yield falling from 4.68% to 4.49%. The main driver for this increased risk appetite was the Fed’s two-day meeting ending on 1 May. The Fed kept interest rates steady at 5.25-5.50% and Chair Jerome Powell said they would more likely keep interest rates at their current level for longer, rather than to raise them again.
This positivity was reinforced following, for the first time in four months, a softer than expected inflation print of 3.6% year-on-year in April (excluding volatile items such as food and energy). At the time of writing, the market anticipates the first 0.25% rate cut by the Fed will occur on 7 November, shortly after the US presidential election on 5 November.
Another area of support for global financial markets has been corporate profits (as measured by earnings per share forecasts). Stocks usually do well when profits are rising, and that has certainly been the case for the S&P 500 index in the United States (+4.8% in May and +26.3% over the past year), with forecasts 12% higher over the past 12 months. Earnings are also expected to grow strongly over the next two years, with profit growth of 13% per annum expected.
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In contrast, the outlook for earnings in Australia has been more challenging. The ASX 200 index rose by 0.5% in May and is 9.4% higher over the past 12 months, with earnings forecasts down 6% over the past year. Current forecasts indicate that earnings are expected to grow moderately over the next two years, with profit growth of 4% per annum expected.
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Elsewhere in May, the People’s Bank of China (PBOC) made significant policy changes, including removing the floor rate on mortgages, lowering the minimum downpayment, and allowing local governments to buy excess housing inventory for affordable housing. These measures aimed to boost demand and address housing oversupply, and provided a boost to the Hang Seng index, which is 13.8% higher since April. The price of iron ore has also risen, up 18.3% since April.
Despite the challenges, we remain cautiously optimistic for the year ahead, considering the progress achieved. While inflation remains above central bank targets, it has fallen considerably and continues to trend lower. Thus, we believe 2024 presents a favourable market environment as the path towards lower interest rates comes into view.
Key Stocks
Wade is the head of the Investment Services division at Cutcher & Neale and has over 10 years of industry experience in accounting and investment advisory roles.
Wade guides his division on the belief that investment portfolios should be built on transparency and flexibility. His expertise focuses on direct portfolio exposure to both Australian and Global Investment markets.
