May 2024 Monthly Market Review

May was decent for global investors. Global stocks gained 2.3% in sterling terms, reversing the losses we saw in April. This also meant new all-time highs for several major stock indices, though with relatively little fanfare. Underlying the return to positive capital market returns were strong corporate earnings and a calming of interest rate upside fears, after US inflation finally resumed its downward path. Rates will not fall as hard or as fast as hoped earlier in the year, but the path downward is practically confirmed. Perhaps more importantly, there was a sense that economic growth and profits are strong enough not to need central bank support – particularly in the US. The table below shows May’s sterling returns in full.

Data showed inflation falling in most major economies, helping solidify rate cut expectations and thereby pushing global bond prices (the inverse of yields) up 0.9% through the month. Inflation momentum was not uniform, though. US headline inflation fell to 3.5%, April’s data showed, while core inflation (excluding volatile elements like food and energy) dropped to 3.6%. These were in line with economists’ expectations and, for core prices, represented the lowest level since 2021. But inflation exceeded expectations in the UK and Europe, at both core and headline levels.

Surprisingly high inflation this side of the Atlantic is not expected to deter the Bank of England (BoE) from cutting rates soon and indeed the European Central Bank (ECB) commenced with its first rate cut already at the time of writing in the first week of June. Meanwhile, the fact US inflation was not above expectations – as it had been since the start of this year – was enough to convince markets that the Federal Reserve will cut rates in the Autumn. Bets on further rate cuts, particularly from the BoE and ECB, have been dialled back, but markets seem to be relaxed about that prospect.

The best performing equity grouping was yet again large-cap US tech, jumping 5.2% in sterling terms. But, this was less about rate cut expectations (lower interest rates push up the near-term valuations of growth companies like tech) and more about stellar first quarter earnings reports. The undisputed winner was yet again AI chipmaker Nvidia – whose profits soared 600% year-on-year in the first quarter of the year.

Interestingly, companies that did not quite live up to the hype were punished by stock traders. Shares in US software company Salesforce fell 20% in a single day after results showed growth of just 10% against projections of 20%. The harsh reaction tells us that stock market growth is based on strong fundamentals. This is a far cry from the ‘valuation vertigo’ concerns earlier in the year, and bodes well for stable equity growth.

Growth is less strong in the UK and Europe, but stock markets still managed to rally 2.1% and 3.5% respectively in May. The flipside of relatively damper economic prospects is that the BoE and ECB have more room to cut rates. Markets correctly priced in a June rate cut from the ECB – which it delivered at its meeting this week – while the BoE is strongly expected to follow suit in August or September.

Elsewhere, Chinese stocks finished the month slightly up at 0.8% after an up and down month. That uptick still puts China among the top performing regions over the last three months, returning 8.8%, following continued economic support from the government and signs that businesses are growing in confidence.

China’s performance was not enough to drive wider emerging markets, though, with Emerging Market (EM) stocks down 1.1% in sterling terms through May. The US dollar has been strong in recent months, which is often bad news for EM businesses with dollar-denominated debts. Currency troubles were a theme for EMs, as election results in Mexico, India and South Africa caused wide swings and laid the ground for a difficult period in EM equities.

One of the worst performing currencies – not just in May but for the year so far – was the Japanese yen. The huge difference in Japanese interest rates compared to the US has pushed capital from the former to the latter, to such an extent that the Japanese government had to prop up the yen’s value last month. This is one of the key reasons Japanese stocks were down 0.3% in sterling terms last month, despite a positive backdrop for Japanese businesses.

Commodity prices were also down, falling 3.5% in sterling terms. This is largely down to a 7.6% slide in brent crude oil prices, which came after signs of weakening global demand. Surprisingly, OPEC+ has since announced plans to boost supply, further adding to oil’s decline at the start of June. In terms of global growth and inflation, falling commodity prices – particularly oil – will almost certainly be a positive, removing a key price pressure.

Overall, May was an encouraging month for investors, even if returns were not as strong as earlier in the year. Not only did markets recover their April losses and hit all-time highs, but fears about unsustainability of stretched valuations have virtually disappeared, as it has become clear that stock prices are based on upgrades to expected long-term earnings. Where those earnings are not expected to be as strong, monetary policy is likely to be more accommodative, and vice versa. The result is a healthy system of market checks and balances, laying the ground for strong returns with little danger of boom and bust.

Please note: The value of pensions and investments can fall as well as rise, and you could get back less than you invested.

Important Information

The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.

Tatton is a trading style of Tatton Investment Management Limited, which is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 733471. Tatton Investment Management Limited is registered in England and Wales No. 08219008. Registered address: Paradigm House, Brooke Court, Wilmslow, Cheshire, SK9 3ND.

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