Market Update – November 2024
Macro Commentary
In October, markets retreated slightly from their all-time highs as expectations of interest rate cuts across developed markets were pared down. In Australia, the S&P/ASX 200 fell by 1.31% during the month. Within the benchmark, the Financials sector muted the loss; rising by 3.29% during the month. Consumer Staples were the worst performing sector, falling by 6.99% with the main negative contributor being Woolworths Group (WOW) which announced a profit downgrade in October, citing customers spending a greater share of their cart on discounted low-margin goods.
In the US, the S&P 500 fell by 0.91%, as corporate earnings reports generally met expectations but management’s cautious outlook tempered investor sentiment—especially within big tech. This sector has fuelled much of the S&P 500’s 22.08% gain this year, largely due to the accelerating adoption of AI, which has driven significant earnings growth. However, big tech companies are making substantial capital expenditures to upgrade data center infrastructure to support generative AI workloads. For instance, Microsoft reported a capital expenditure of $14.9 billion USD in the latest quarter, marking a 50% increase year-on-year. Concerns about high spending and slower revenue growth have led to post-earnings declines for companies like Microsoft and Meta. Nevertheless, we believe these investments will enable big tech firms to expand revenue by enhancing product offerings while also realizing internal cost efficiencies, as generative AI boosts productivity across engineering and operational functions. We maintain a preference for these quality growth companies.
Australia’s labour market remains exceptionally tight, with September data showing the unemployment rate dropping to 4.1% despite a record-high labour force participation rate of 67.2%. While headline inflation appeared to cool, rising only 0.2% quarter-on-quarter, this was largely due to temporary electricity rebates. Core inflation pressures persist, as evidenced by the RBA’s Trimmed Mean inflation measure, which rose by 3.5% year-on-year, well above the RBA’s 2-3% target. This persistence has led traders to largely discount the likelihood of rate cuts in 2025, with swaps indicating a 62% probability of a 0.25% rate cut by November 2025.
In the US, economic data has remained robust. Early October’s labour market report showed the addition of 223,000 jobs in September, surpassing the 140,000 consensus estimate. Inflation also rose slightly more than anticipated, while preliminary Q3 2024 GDP growth was reported at 2.8% year-on-year—just below the 3.0% consensus and Atlanta Fed’s mid-month 3.5% GDPNow estimate. Overall, the data remains positive, with strong economic growth, a labour market nearing pre-pandemic levels, and ongoing disinflation. These indicators likely reinforce the Federal Reserve’s confidence that current rates are not overly restrictive, supporting a cautious approach to any future loosening of monetary policy.
Global bond markets have declined from their mid-September highs, as resilient US economic growth has tempered expectations for the speed and scale of future interest rate cuts. The Vanguard Global Bond ETF, which tracks the Bloomberg Global Aggregate Index, dropped by 2.17% in October, while Australian government bonds saw a slightly steeper decline of 2.66% for the month. We continue to favour Australian fixed income over US fixed income, as Australia faces a higher recession risk due to a faster slowdown in consumer spending and a relatively limited capacity for government borrowing to fund deficits. Given the pronounced inversion of the US yield curve compared to Australia’s flatter curve, we see Australian fixed income as offering better potential for capital appreciation should economic growth slow in Australia and the RBA is forced to expedite rate cuts.
On 5 November, Donald Trump was elected to the White House as the 47th President, sweeping all nine swing states and capturing the popular vote. This unexpected victory lifted US markets, with major indices like the S&P 500, Dow Jones, and NASDAQ rising between 2% and 4%, while the small-cap Russell 2000 surged nearly 6%. Economists expect Trump’s proposed fiscal policies to drive up the US deficit by nearly $16 trillion over a decade, potentially leading to higher bond yields and a stronger dollar as markets assess the risks. The US 10-year yield, already trending higher, could break further upward as investors anticipate increased spending and possible inflationary pressures. Trump’s policies are likely to impact sectors unevenly. Increased fiscal spending and corporate tax cuts could support US equities, particularly in energy and manufacturing sectors, though higher rates may weigh on leveraged industries like property. In Australia, potential tariffs on Chinese exports could weaken Chinese growth, indirectly affecting Australian equities given trade ties.
DISCLAIMER:
The contents of this publication are only intended to provide a summary and general overview of matters of interest in the financial markets and in the economy and are distributed in order to promote broad discussion. The publication does not constitute investment or financial product advice, it does not constitute an offer or invitation to purchase a financial product or financial service, nor does it of itself create a client-financial adviser relationship. To the extent that any part of the contents of this publication may be said to constitute “general advice” we warn you not to act on any matter referred to in this publication without first seeking qualified financial product advice appropriate to your particular circumstances, needs and objectives before acting or relying on any content in this publication. TWD Licensee Services Pty Ltd (ABN 88 605 064 480 – AFSL 475964) makes no warranties or representations about the accuracy or completeness of the content of this publication, and excludes, to the maximum extent permissible by law, any liability which may arise as a result of the use of the content of this publication.