Market commentary - July 2024

A shocking attempted assassination of Republican nominee Donald Trump and the sitting president curtailing his re-election bid owing to health concerns: July was a wild month in US politics by anyone’s measure.

Trump trade sparks stock market 'rotation'

Events have changed the tone, and possibly even the outcome, of the November US election, galvanising Trump supporters. This prompted a so-called ‘Trump trade’, a rotation out of big tech stocks and into value and income names, as well as smaller companies, as Donald Trump’s likelihood of winning the election was seen to increase. More importantly, it was seen to improve the chance the Republicans will control both Houses of Congress, easing the passage of new legislation.

The reaction seems logical enough. Trumponomics favours tax cuts, trade tariffs and curbs to immigration, all of which are inflationary, but perhaps also positive to domestic industry and many small and mid-sized companies. Meanwhile, chosen potential Vice President, JD Vance, has been vocal on competition laws regarding the big tech companies. More broadly, there are concerns that Trump policies of reshoring and tariffs will stoke inflation longer term, which is a negative for ‘longer duration’ assets including longer dated bonds and growth stocks.

Yet Mr Trump’s passage to the Whitehouse is far from a done deal. Biden’s vice president and running mate Kamala Harris is all but confirmed as the Democrat candidate, and she has the advantage of being considerably younger but sharing the same values as Mr Biden. This could gather her some wavering voters who were concerned with the President’s frailty and ability to see out another term.

With still over three months until polling day, the election is likely to remain a source of market uncertainty – in contrast to the foregone conclusion and relative calm of the UK’s transition of power.

Are interest rates coming down?

Despite the considerable political noise, expectations for interest rates also had a big say in market moves. Milder US headline inflation delivered a positive surprise to investors as it slowed from 3.3% to 3.0% in June, the third month in a row of slower-than-expected price rises. As a result, the US Federal Reserve looks to be on course to make its first interest rate cut at the mid-September meeting. Later in the month, some surprisingly strong growth numbers put that into some doubt, another seemingly contradictory picture presented by US data.

Nonetheless, markets remain confident Fed interest rate decisions will result in at least two cuts in 2024, with inflation in the shorter term at least coming under control. Investors appear less sanguine about inflation further into the future, but the overall result was to cement a rotation of stock market leadership. Economically attuned areas and sectors had the upper hand and more interest-rate sensitive stocks and sectors, including longer dated bonds were laggards.

Consequently, although the main indices were broadly flat over the month, there was considerable day to day volatility. Plus, under the surface of the index moves there was significant dispersion between winning and losing stocks and sectors.

Whether market leadership has decisively shifted away from big tech names and the towards value and higher yielding areas that have lagged for much of the past 18 months we will have to wait and see. Quarterly earnings releases for many of the giants will be influential, and into the month end there were rallies in some of the tech names such as Nvidia and Meta. However, the prospects for a broader range of companies seem to be turning up amid long-awaited cuts in interest rates and a US economy that is still faring well, at least for now.

Gold continues to glitter, plus a boost for UK smaller companies

It was a quieter month overall elsewhere, although gold continued to gather momentum increasing to another record high before falling back. Cuts to interest rates promise to be beneficial to gold because they reduce the competition from income-paying assets such as cash or bonds. A possibly inflationary Trump presidency has also driven some investors to prize monetary safe haven assets.

It was also a good month for UK Smaller Companies as low valuations and hopes for interest rate cuts boosted sentiment. The upturn in fortunes for this part of the UK market has partly been down to corporate and private equity buyers increasingly capitalising on low valuations to snap up complementary businesses. This merger and acquisition activity has helped shine a spotlight on the sector and underscore the value to be found.

Meanwhile, larger UK companies had a solid month but were held back by weakness in energy and commodities, which also saw Latin America struggle. Worries persist over the Chinese economy and waning demand for many key natural resources.

Explore the top performing funds in July 2024