In our latest monthly update video, our Chief Investment Officer Richard Flax looks back at an overall positive month for the markets in October and explores what’s driving investor sentiment as we head into year-end. You can also find a written version of his commentary below.
October was a bit of a repeat of September in financial markets. Global bonds (measured in sterling) eked out a small gain, while global equities saw another strong performance rising close to 5%. Gold was more volatile, but still ended the month up around 6%. Within equities, the picture in October mirrored the previous month – emerging markets outperformed, followed by the US, while European equities lagged behind.
On the policy side, we saw another 25 basis point cut from the US Federal Reserve – very much as expected by investors. Investors have been expecting another 25 bps cut in December, but Fed Chair Jerome Powell highlighted in his comments that another cut wasn’t guaranteed. At the same time, the US Central Bank also announced that it would stop reducing the stock of bonds it holds from the 1st of December – so-called “quantitative tightening” – suggesting that it doesn’t want to remove any more liquidity from the financial system.
In Europe, the European Central Bank kept its policy rates unchanged in October, again largely as expected. In the UK, we saw government bond yields move lower in October on the back of a better than expected inflation report. Inflation is still well above target, but if we continue to see softer macro data, then we could yet see a rate cut in the UK before the end of the year.
We’ve seen a raft of earnings reports coming from the US over the past few weeks. As you might expect, large tech companies were a particular focus of attention. In general, the results for these tech businesses were pretty strong, even compared to high expectations. There remains some concern about just how much money these businesses are spending on their AI roll-out, and when we’ll see these companies get the benefit of that investment. This will be an ongoing focus of attention. But for now, they’re growing fast and remain very profitable.
Data for the month
Octobers datapoint was September UK inflation, which rose 3.8% year on year. That’s well above the Bank of Englands 2% target, but it’s below the 4% figure that most economists were expecting. The Bank of England has had to content with high inflation and weak growth for some time – and the September data release will have come as a welcome relief for policy makers. The case for cutting rates has gotten stronger.
Question for the month
What have we learned from the 3rd quarter earnings we’ve seen, particularly in the US?
Company earnings reports provide useful updates on the current state of the business and, taken together, can give a decent picture of the health of the underlying economy, if only of the recent past.
The message from this quarters earnings season has been fairly clear. Listed US companies, in aggregate, remain in pretty good shape. They’re continuing to grow and their profit margins are very healthy, compared to history.
But it’s also worth highlighting that a lot of that strong performance comes down to a relatively small number of large tech companies. They’re spending aggressively, often with each other, in order to capture the potential gains from Artificial Intelligence.
That raises a couple of questions. First, can these companies continue to produce such strong results? And second, what about all the other US companies? The first question continues to dominate discussion among investors. For now, these companies continue to generate strong growth and invest for the future. But expectations are high and it’s still to be seen how quickly companies and households will really adopt, benefit (and pay for) AI.
On the second point, the non-tech world has shown decent results. More companies than usual have beaten analyst expectations, but we are seeing some softness in the labour market, and not just from announced lay-offs in tech. So results have been solid for now, and generally better than expected, but we’ll have to see how much a weaker job market impacts consumer demand.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
