Comparing financial markets to playing a round of golf, Fidelity International’s Tom Stevenson suggested that now is the time for investors to strategise for “the back nine”.
“The investment course has been kind to us so far in 2024. But there are some tricky holes ahead and achieving a decent score by the end of the year will require us to address three questions,” Stevenson said in a recent market outlook.
Leading the charge are politics, entangled in what has been a bustling year for elections. With surprises already seen in the likes of India, Stevenson said attention now turns to the upcoming contests in the UK and the US.
According to Stevenson, the US decider matters more for financial markets.
“Neither candidate is popular,” he said. “But it’s close and the fate of presidents seeking re-election since Ronald Reagan has been heavily influenced by macro trends in the months leading up to the vote. Consumption growth, employment data, inflation and GDP are the indicators to watch.”
Stevenson, however, pointed out that, “It is worth remembering that elections affect sentiment in the short term, but, as we learned in 2016, they tell us less about the longer-run direction of the stock market.”
Monetary policy, he judged, will be a bigger driver in the year ahead than politics, especially given this year was predicted to be the “Year of the Interest Rate Pivot”.
While some countries have started the process of cutting interest rates, others have yet to move in this direction, including the likes of the US.
“The US is holding fire, and for good reason,” Stevenson said.
“The American economy remains stronger than expected at the start of 2024 and a cut in the cost of borrowing is hard to justify.”
The key question, he said, is will US interest rates start to fall this year and how far?
“Interest rates are likely to stay higher for longer than we hoped six months ago. It’s not clear where the neutral rate lies (not too hot, not too cold), but wherever the end point is it will take some time to get there.”
He posited that the US is unlikely to get more than one rate cut before the end of the year, despite the market expecting six quarter point cuts at the start of 2024.
On the plus side, Stevenson noted that this might be better for share prices because the incentive to seek “other homes for your money” is less today than it was.
“Yes, you can expect to beat inflation with the income you can earn on a Treasury, or even cash. But the price you pay for that certainty of income is a lack of capital growth. And if inflation stays persistently higher than target, you will need some growth to keep your head above water in real terms.”
Moreover, Stevenson highlighted market leadership as another key consideration for investors, especially given five stocks – Microsoft, Nvidia, Alphabet, Amazon, and Meta – account for 60 per cent of the S&P 500 Index’s year-to-date gains, rising 45 per cent collectively and now comprising a quarter of the index’s total value.
“That’s been justified by earnings growth – up 84 per cent in the first quarter, year on year, compared with 5 per cent for the average stock in the US benchmark,” he said.
Predictions are that these top performers will continue to outpace others, with earnings growth of 19 per cent versus 11 per cent for other stocks in 2025, and 13 per cent versus 9 per cent in 2026. This variation, Stevenson said, is critical as the headline index trades at 21 times expected earnings versus 16 times for the equal-weighted index, potentially impacting market dynamics in late 2024.
“If the gap between the two narrows because the expensive market leaders get cheaper (rather than the rest of the market catching up with them), then the second half of 2024 could be hard work,” he said.
Ultimately, Stevenson said that 2024 began on strong footing.
“The-best performing stock markets in America and Japan have delivered between 15–20 per cent in the first six months alone. The second tier – UK, Europe, emerging markets – have already secured a decent 6 per cent or 7 per cent. Even China is back in positive territory. Copper, oil, and gold have all provided investors with a double-digit return.
“Even the laggards – property and government bonds – have not really lost you any money this year. So, it’s been a tidy front nine. The investment equivalent of a couple of birdies and a string of pars.
“But, as any golfer will know, things can change dramatically at the turn.”
He cautioned that a change of leadership could alter the valuation arithmetic of the market, while higher-for-longer interest rates could be the sign of an economy in good health but also the precursor of a nasty slowdown.
“The aftermath of elections on either side of the Atlantic may be volatile. It’s not over until your card is signed and submitted.”
