Weekly Comment

With inflation figures moving closer to the target and a noticeable slowdown in job growth, the Federal Reserve (Fed) decided to lower the benchmark interest rate by 50 basis points (bps). This significant move had not been seen since the emergency rate cuts during the COVID-19 pandemic in 2020. Outside of those emergency situations, the last time the Fed made a cut of this size was in 2008 during the global financial crisis. The market had expected this decision, though there was some debate over whether the cut would be 25 or 50 bps. As a result of this change, the federal funds rate range is now 4.75–5.0%. 

The Fed’s statement noted that recent indicators show the economy continues to grow at a steady pace. Job growth has slowed, and the unemployment rate has inched up slightly but remains low overall. Inflation is progressing toward the Fed’s 2% target but remains somewhat elevated. In the future, when considering rate adjustments, the Fed will carefully assess incoming economic data, evolving conditions, and the overall balance of risks. 

Additionally, the Fed updated its economic forecasts, making some adjustments for the remainder of this year and next year. They now expect the federal funds rate to average around 4.4% by the end of 2024, down from the 5.1% projected in June, suggesting another potential 50 bps cut. By 2025, they project the rate to be around 3.4%, lower than the previously estimated 4.1%. Economic growth expectations remain steady, near 2% for this year and 2025. However, the unemployment rate forecast has been revised up to 4.4% (currently at 4.2%) from the 4% estimated in June. For 2025, the unemployment rate is expected to stay at this level. 

Finally, the core inflation forecast (excluding volatile items like food and energy), measured by the Core PCE, is expected to decline to 2.6%, down from the previous estimate of 2.8%, and to reach 2.2% by the end of next year. 

Update of FED Indicators (September vs. June)

Source: Federal Reserve

We know that September has historically been a challenging month for the markets. While this month tends to be tricky, understanding the reasons behind this trend will allow you to be better prepared. Here are some key insights: 

• Market Seasonality: September has proven to be the weakest month for the stock market. Since 1928, the S&P 500 has averaged a performance of -1.2%, closing with gains only 44.3% of the time. 

• Portfolio Rebalancing: With the year approaching its end, many institutional investors adjust their portfolios, which can increase selling pressure. 

• Post-Vacation Volatility: The return of traders after summer often brings increased volatility. 

• Economic Data and Geopolitics:  This month, significant economic data and monetary policy decisions are expected to influence market sensitivity. Moreover, geopolitical tensions remain present, adding uncertainty.  

In a nutshell, while September can be volatile, staying informed will help us navigate with greater confidence. 

We encourage you to continue monitoring the market and preparing for any scenario. 

Historical monthly average performance 

DJIA – Dow Jones (1897), S&P 500 (1928), Nasdaq (1971) y Russell 2000 (1987) 

Source: Marketwatch – Dow Jones Market Data 

Discover the main conclusions from recent market movements and how they might impact on your investments.

August presented us with a rollercoaster in the markets, starting with an initial correction followed by a fast recovery. However, behind this volatility lie important signals we need to consider:

Soft landing on the horizon:

• The economy continues to show strength, but with signs of slowing down, particularly in the labor market. Nonetheless, the economy is not at risk of significant deterioration. A soft landing remains the most likely scenario.

Fed preparing to cut rates:

• With economic growth moderating, inflation decreasing, and the labor market cooling, it’s likely that the Fed will reduce interest rates by 25 base points at its next meeting on September 16.

Solid Corporate Earnings but with Challenges:

• S&P 500 companies reported strong earnings for the second quarter (+8% year-over-year), with interesting growth beyond the “Magnificent 7” (+4.6% year-over-year excluding this block of companies) for the first time in five quarters, but future prospects have moderated.

Volatility Ahead:

• Negative seasonality, economic and geopolitical uncertainty, as well as upcoming elections, could increase volatility in the markets.

How can you navigate this volatile environment?

Maintaining a long-term investment strategy is crucial to overcome market storms.

Stay informed: This is the survey outlook for the upcoming US elections

Source: RealClearPolitics

A market correction is defined as a decline of 5-10% in a bull market. Although these events may seem like a sudden storm, they are a natural part of market cycles.

Corrections can be triggered by various factors, from geopolitical tensions to disappointing corporate reports. These adjustments allow asset prices to align with their true values and prevent the formation of bubbles, while also offering new opportunities for investors.

How can you effectively navigate a market correction?

• Stick to your investment plan: Ensure your actions align with your financial goals, risk tolerance, and investment horizon.

• Diversify your portfolio: A diversified portfolio can help mitigate the risks associated with corrections. Spreading your investments across different asset types reduces exposure to market fluctuations.

• Stay informed and avoid panic: While it’s important to stay updated on market news, don’t let sensational headlines affect you. Keep calm and focus on your long-term goals.

In a nutshell…

Panic selling that may arise from a correction, along with the potential loss from not investing on the market’s best days, has significantly impacted investor performance over the past 50 years.

Panic selling can weigh on the long-term performance of a portfolio.

Source: Raymond James – Juliusbaer

With nearly 90% of the Q2 reports already submitted, we share the key takeaways of the season:

EPS Growth:

• Earnings Per Share (EPS) exceeded initial expectations with a year-over-year increase of +8.3%.
• 79% of companies reported EPS above expectations, surpassing the long-term average of 75%.
• The EPS growth for the S&P 500 was positive, even excluding the Mag-7, for the first time in five quarters, with a +4.6% year-over-year growth.

Uneven Performance:

Despite an overall solid season, some indicators fell short of expectations.

• The proportion of companies that beat sales estimates in the U.S. dropped to 48%, well below the long-term average of over 60%. In its year-over-year variation, sales grew +5%.
• This could put pressure on profit margins in the second half of the year.

Regional Performance:

• U.S. companies showed better performance in terms of EPS, with an 8% year-over-year growth, compared to +1% in Europe.
• However, the proportion of companies exceeding sales estimates in Europe (51%) was higher than in the U.S. (48%).
• This performance aligns with fluctuations in exchange rates.

Sector Results:

• The Materials and Consumer Staples sectors showed weaker results.
• In contrast, Consumer Discretionary, Healthcare, Financials, and Utilities experienced double-digit EPS growth.
• Amazon was the biggest driver of growth in the Consumer Discretionary sector; without Amazon, growth in this sector would have dropped by 6% year-over-year.

Future Perspectives:

• Despite challenges such as high interest rates and slowing employment, the overall resilience of the economy may continue to drive corporate earnings.
• An annual growth of 10.3% is expected for this year, slightly below the initially estimated 10.8%.
• For the next year, earnings growth is projected to be close to 15%, which seems somewhat optimistic for a scenario of economic slowdown.

S&P 500 Earnings Growth and S&P 500 Excluding the Magnificent 7

Source: JP Morgan

The Consumer Price Index (CPI) increased by 0.2% in July, meeting expectations, following a slight decrease of 0.1% in June. This reduced the annual CPI rate to 2.9%, the lowest since March 2021. Excluding food and energy, the core CPI also increased by 0.2% monthly, with an annual rate of 3.2%, remaining within expectations and reaching its lowest level since April 2021.

Here’s the performance of the key components:

Performance of key components:

• Energy: The energy index remained unchanged in July, following a 2.0% decrease in June. Gas gauge index also didn’t change during the month. On an annual basis, the energy index increased by 1.1%.

• Food: This component increased by 0.2% in July, the same as in June.
• The index for food at home increased by 0.1% in July (+1.1% annual). Three of the six major supermarket food indices increased, while the other three decreased.
• For food away from home, there was a 0.2% rise in July (+4.1% annual), following a 0.4% increase in the previous two months.
• On an annual basis, the entire food category advanced by 2.2%.

• Shelter: This category increased by 0.4% in July, representing almost 90% of the monthly increase in the overall index.
• Rents increased by 0.5% during the month.
• The index for shelter away from home increased by 0.2% in July, after a 2.0% decline in June.
• The entire shelter category recorded a 5.1% annual increase.

General Context:

This data, along with the recent drop in producer inflation to its lowest level in a year and a half, strengthens the possibility of a rate cut in September. Although pressures in the shelter sector persist, the consensus expects that at the September 17-18 meeting, there will be almost an equal chance of a reduction of either a quarter or half a percentage point.

Change (%) in the last twelve months of the CPI and Core CPI

Source: U.S. Bureau of Labor Statistics

Macroeconomic Complexity and Possible Rate Cut in September

Recently, the complexity of the macroeconomic environment has made it difficult for the Federal Reserve (Fed) to maintain stable inflation and full employment. The Fed faces a dilemma: waiting too long could weaken economic growth, while a premature rate cut could impact the progress in inflation. However, the latest data suggests that a rate cut in September (and perhaps later) could be imminent. Key factors include:

Slowdown in job creation

• Consumer confidence in decline: More and more people believe it’s difficult to find a job, reflecting growing pessimism about the job market.
• Less job openings: Vacancies have decreased from 12 million to 8.2 million, indicating less pressure in the market.
• Hiring Slowed: In July, only 114 thousand new jobs were created, the lowest number since December 2020, with unemployment rising to 4.3%, the highest level since October 2021.

Cooling of inflation

• Lower wage pressure: Wages continued to grow at a slower pace in the second quarter, with the lowest increase since December 2021, according to the Employment Cost Index.
• Pricing difficulties: Companies like Procter & Gamble and McDonald’s have found it difficult to pass on cost increases to consumers, suggesting a weakening in their pricing power.
• Increase in productivity: Technological advances, such as artificial intelligence, are boosting productivity, which could help to control labor costs and support disinflation.

Weakness in interest rate sensitive areas

• Manufacture: The ISM Purchasing Managers’ Index (PMI) has been in contraction in 20 of the last 21 months, signaling weak demand and less new orders.
• Housing Market: High mortgage rates continue to impact home sales and builder confidence, with affordability at low levels.
• Automotive Industry: High financing costs and elevated prices are challenging the automotive sector, increasing sales incentives and competition.

In this scenario, the argument for an interest rate cut strengthens, supported by Jerome Powell’s more moderate comments in the latest Fed statement. Although the economy appears to be heading toward a soft landing, future economic data is likely to remain weak, which could increase volatility in the markets.

Federal Funds rate cut expectations.

Source: Raymond James

The perfect storm forms for a day: Expectations rise towards the Fed.

By: Bernardo Trejo, Equity Specialist

After Monday’s volatility, the markets took a breath, influenced by several factors: low employment rate in the U.S., an interest rate hike in Japan, geopolitical tensions in the Middle East and disappointing reports from some tech companies. However, the markets seem to digest the situation better.

Despite July’s low employment rate, job creation continues, yet at a slower pace, and positive economic growth is expected this year despite a slowdown. In this context, the main Japanese index recovered much of the ground lost on Monday, and indices in the U.S. also showed signs of recovery.

The expectation of a more aggressive Fed rate cut in September and the rest of the year has been strengthened. This could end the cycle of high interest rates and steer U.S. monetary policy towards greater stability following the economic effects of the pandemic. Undoubtedly, this shift should improve the environment for the markets and provide an extra boost to the economy to prevent a recession.

In conclusion, although we may see more episodes of volatility as new economic data emerges, this environment of hypersensitivity leads us to maintain caution, restraint, and patience. Staying informed and adhering to a long-term strategy will be crucial for navigating these times.

Global Volatility: Impact of rate hikes in Japan and markets perspective.

By Jose Cova, Portfolio Manager Director

Yesterday, the stock market experienced notable volatility, driven by the recent interest rate hikes by the Bank of Japan (BoJ). This decision had a strong impact on the value of the Yen, which has seen significant appreciation.

For years, negative interest rates in Japan fostered a massive “carry trade” (estimated at $1 trillion, according to Deutsche Bank). In this scheme, investors took low-cost local bank loans to finance the purchase of both foreign and domestic assets. However, with rising inflation and wage pressures, the BoJ was forced to increase interest rates, leading to a strong rise of the Yen.

This appreciation of the yen has triggered a reversal in the carry trade, where the investors are selling their assets and repaying their yen-denominated loans, as maintaining these positions has become less profitable. This reversal has led to a correction in global stock markets. Despite this volatility, stocks in the U.S., Europe, Japan, and emerging markets still show gains so far this year.

Looking forward, it is likely that we’ll continue to see volatility in the markets. This is partly due to the ongoing release of weak economic data in the United States, which creates uncertainty about how the Federal Reserve (Fed) will respond. The economic outlook in the U.S. is mixed: Although business and consumer spending, as well as corporate profits, remain relatively strong, some indicators suggest a possible recession.

In summary, the current environment requires caution and a well-grounded strategy to navigate market turbulence. Staying informed and attentive to economic developments will be crucial in the upcoming months.

 

With the November U.S. presidential election approaching, and with former President Trump leading in the polls while President Biden endorses Vice President Kamala Harris, a key question arises: how do elections affect markets and portfolio returns?

Do elections matter in the long run?

To answer this, let’s look at some historical data. Surprisingly, markets have trended upward no matter which party wins the election. Since 1933, with eight Democratic presidents and seven Republican presidents, the market trend has always been upward. The key is to stay invested!

Landslide victory or balance in Congress?

It’s not just the presidential election that matters. Markets have had good returns regardless of how Congress is composed. Since 1933, there have been 44 years in which one party controlled both the presidency and Congress, with an average return of 14.4%. Even with a divided Congress, returns were almost as good at 13.7%. And even when Congress was of the party opposed to the president, returns were still in double digits (11.7%).

Investor Behavior

Elections impact investor behavior. During election years, many tend to opt for lower-risk instruments. However, right after the election, equity funds tend to see the largest net inflows. This indicates that investors prefer to minimize risk during election uncertainty and reconsider riskier assets once it passes.

Changing strategy during these years can limit long-term portfolio returns.

The history is clear: those who stayed on the sidelines during election years performed worse on 17 occasions, and better on only 3. In contrast, those who stayed invested or made monthly contributions achieved higher average balances.

Conclusion

Although presidential elections can influence market behavior in the short term, staying invested for the long term has proven to be a winning strategy.

Hypothetical historical growth of a US$1,000 investment in the S&P 500

Note: Party control dates are based on opening dates. Values are based on total returns in USD.
Source: Capital Group

Three hypothetical US$10,000 investment strategies during an election cycle

Note: Returns and portfolio values are calculated monthly and in USD. The analysis begins on January 1 of each election year and reflects a four-year holding period. Past performance is not predictive of results in future periods.
Source: Capital Group

The Global Wealth Report 2024, which analyzes the trends and dynamics impacting the global economy, is now available, and here are the highlights.

Recovery since 2022

2023 marked a positive change in global wealth, recovering from a drop in 2022. Global wealth increased by 4.2% in USD terms, thanks to the EMEA (Europe, Middle East and Africa) region, which grew by 4.8%. This recovery is due to the stabilization of global markets, the post-Pandemic economic recovery and an improved investment climate in key regions.

Wealth Distribution

Over the past two decades, the distribution of wealth has changed dramatically. The proportion of individuals with wealth below USD 10,000 has halved, while the highest levels of wealth have increased significantly.

What does this mean? The trend indicates that more and more people are achieving higher levels of wealth, reflecting an increase in the value of assets in various markets. However, global wealth inequality shows different dynamics:

• North America has experienced a slight decrease in inequality.
• In contrast, certain parts of Asia and Eastern Europe have seen increases in inequality.

This change in the distribution of wealth is a key indicator of global economic and social dynamics.

Regional Performance

• Asia-Pacific: Continues to show the fastest growth in wealth, driven by rapid economic expansion and the rise of the middle class. However, this growth is accompanied by rising levels of personal and corporate debt, raising concerns about sustainability.
• North America: Especially in the United States, wealth growth has been robust due to strong stock market performance and high real estate values. Wealth inequality has seen a slight decline since 2008, thanks to various socioeconomic policies.
• Western Europe: Shows mixed economic performance. Countries such as Germany and Switzerland continue to see a significant increase in wealth, while others face economic stagnation due to challenges such as political instability and a slower post-Pandemic economic recovery.

Inflation and Exchange Rate Effects

In 2023, inflation-adjusted real wealth growth reached 8.4%, highlighting significant gains compared to the previous year.

What drove this growth? Primarily, lower global inflation rates played a crucial role. In addition, currency fluctuations had a major impact, affecting wealth performance in countries such as Japan and the United Kingdom.

This real and inflation-adjusted growth underlines market resilience and recovery capacity.

Deceleration Trend

The report reveals a gradual deceleration in global wealth growth from an annual average of 7% between 2000 and 2010 to just over 4.5% between 2010 and 2023.

Why is this happening? Primarily due to market saturation in developed economies and economic volatility in emerging markets.

However, there is good news: the number of top wealth individuals is projected to increase significantly by 2028, with emerging markets accounting for nearly 32% of global wealth. This projection is based on continued economic growth and rising asset values in these regions.

In addition, a significant transfer of wealth is anticipated over the next two to three decades, with USD 83 trillion (trillion in U.S. values) expected to be transferred. A substantial amount of this wealth will be passed between spouses before reaching the next generation.

Distribution of global wealth by region in 2023

Source: UBS

The U.S. economy added 206,000 jobs in June. However, it was notable that the report revised down previous estimates of job creation in May and April. According to the consensus estimate, the economy was expected to add 190,000 jobs in June from the 272,000 originally reported in May, a figure that was adjusted to 218,000. In addition, the April hiring increase was revised to 108,000 from 165,000. With these revisions, the June employment report showed a slowdown in the three-month moving average for hiring. The report also highlighted that the increase in new jobs was led by government, health care, social assistance, and construction. Conversely, several sectors experienced declines, including professional and business services and retail trade.

On the other hand, the unemployment rate, which had been expected to remain at 4.0% from May to June, rose to 4.1%, placing it at its highest point since October 2021. This level of unemployment is more aligned with the macroeconomic scenario recently shared by the Federal Reserve (Fed). That said, it is important to mention that, in June of last year, the unemployment rate stood at 3.6%.

As for wages, the average hourly wage increased 0.3% during the month, which implied an annual advance of 3.9%, both figures in line with estimates, although the latter below May’s 4.1% annually. The average workweek remained stable at 34.3 hours.

This deceleration in employment generation, and subject to confirmation by the end of the week that June inflation may have dropped to 3.1% annually from 3.3% according to the market forecast, should be factors that, in turn, could allow the Fed to implement a first 25 bp cut in the reference rate during the September 18 meeting. In this context, the consensus odds of seeing a cut stand at 73%, up from 46% about a month ago.

Monthly Change in Nonfarm Payroll – 3 month moving average

Source: Morningstar

Federal funds rate expectations for the September 18, 2024 meeting

Source: Morningstar – CME