Monthly economic and market review: September 2024

There was an element of caution going into September, given that US markets have historically exhibited a seasonally weaker trend in the month. That trend looked set to be repeated as the markets lost 3-4% out of the gate but central bankers had other ideas. Leading up to the Federal Reserve Bank’s meeting on the 18^th of September, the market was debating whether the policy easing to come would be in the form of a 25 basis point or a 50 basis point rate cut. Last minute weaker-than-expected labour market data tilted expectations towards the latter view and Fed chairperson Powell obliged with a 50 basis point cut to the target of the Fed Funds rate. Attention then swung towards the South African Reserve Bank with their policy announcement the next day and, largely as expected, Governor Kganyago reduced the repo rate by 25 basis points. A week earlier, the European Central Bank (“ECB”) had lowered rates for the second time after first easing policy in early June. The ECB had promised in June that future easing would be data-dependent and would not be a fait accompli at every meeting but the September cut of 25 basis points in the deposit rate was widely expected.

The market rally in the days leading up to the central bank meetings meant that by the time the policy-makers had concluded their proceedings, the S&P 500 and the FTSE/JSE All Share index had both fully recovered their early September losses (see chart below). The start of the rate cutting cycles in the US and in SA and the continuation of easing in Europe were welcomed but the real fire lit beneath the markets came from the Chinese monetary policy authorities. In the absence of any meaningful policy stimulus, the Chinese markets had been sliding lower and lower but the introduction of a number of simultaneous monetary policy easing measures boosted sentiment and sent the local Chinese markets ratcheting higher. The prospect of a faster growing China (with more stimulus to come) was welcomed by markets around the world. Commodity prices broadly rallied on the potential for greater Chinese demand while falling US interest rates lifted the gold price to new record levels. Stock markets rallied around the world and the JSE was lifted to new all-time highs as the S&P 500 and the Dow Jones Industrial Average closed at record levels for the umpteenth time this year. The FTSE/JSE All Share index rose 3.3% in September for a capital return of 12.6% for the first nine months of the year. The total return including dividends amounted to 17.3% for the period. Considering the rand’s appreciation this year, the JSE’s benchmark index returned 19.2% in US dollar terms for the first three quarters of 2024 (a 24.2% total USD return). The S&P 500 gained 2.0% in September for a year-to-date return of 20.8% and a total return for the nine months of 21.6%. The Nasdaq Composite index was up 2.7% for the month and 21.2% for the year-to-date while the Dow Jones Industrial Average gained 1.8% in September and 12.3% in the nine months of 2024.

FTSE/JSE All Share index (blue, RHS) and S&P 500 index (green, LHS): 12 months to 30 Sep 24

Source: Factset

The rand continued to appreciate in September, with gains against all the major crosses. The rand’s strength against the dollar was fuelled by the SARB’s smaller rate cut (25bp off 8.25%) relative to that of the Fed (50bp off 5.50%), which left domestic yields that much more attractive for the carry trade (see table below). The dollar did weaken on the global stage during September but the rand’s firmness was also fuelled by positive domestic factors: the ongoing afterglow from the formation of the GNU, an uninterrupted power supply, a smaller current account deficit, moderately improved confidence levels and an expectation of some improvement in economic growth from near zero levels. The prospect of further rate cuts fuelled that moderate improvement in sentiment with the taming of inflation opening the door to that potential interest rate relief. Headline CPI in the US printed at 2.5% at the last reading, extremely near the 2.0% official inflation target and at a level not seen since early 2021. The South African CPI dipped below the midpoint of the 3-6% inflation target range and printed at 4.4% year-on-year to record its lowest level since April 2021. Bond yields had been advancing ahead of the expected monetary policy easing but they rallied further in September as expectation became reality. The table below reflects the movement in US treasuries along with the yield on South Africa’s 10-year benchmark government bond. What is noticeable is how the US Treasury yield curve began to normalise once again in September with the two year treasury yield below that of the 10-year bond for the first time since the yield curve inverted back in July 2022 and sent investors hurrying for the hills and shrieking “recession”.

The table above also reflects the improvement in the gold price and the prices of other commodities. Oil retreated on the expectation of further softness in demand but the Chinese stimulus measures that were announced provided a ray of hope for the other battered commodities. The improved prices across the commodity complex helped lift the resources sector of the JSE but other parts of the market also benefitted. Naspers and Prosus were major beneficiaries in the month as Tencent’s share price gained strongly in Hong Kong (see table below). Outside of the broad market euphoria on easing policy around the globe (and particularly China), selected stocks were boosted or knocked on their own individual news or fundamentals. Aspen topped the list of losers after reporting weaker than expected profits at a time when Chinese authorities were actively looking to push drug prices lower. Sasol lost significant ground as the oil price slumped to just over $70 per barrel and AngloGold Ashanti shareholders did not seem too enamoured with the $2.5bn bid for Centamin, the owner of Egypt’s largest gold mine, Sukari.

With the market anticipating the start of the third quarter earnings season for S&P 500 stocks from early October, corporate results were few and far between during September. Nvidia had reported stellar results at the end of August but the outlook and guidance disappointed many and the share lost ground in the early part of the month. Those losses were largely recovered by the end of the month as CEO Jensen Huang concluded his personal selling programme and the counter remained the best market performer in 2024 amongst the 100 largest S&P 500 companies (see table below). The company also rejoined the $3 trillion market capitalisation club for a brief moment in late-September but by month-end only Apple ($3.5 trillion) and Microsoft ($3.2 trillion) were left in that exclusive group. Tesla was a big winner in the month (+22.2%) after earnings upgrades from the market and some renewed excitement about its robotaxi launch in October. Oracle was another big winner after posting strong results, providing strong revenue guidance and announcing a new deal with Amazon Web Services.

Sectors that outperformed the S&P 500 index’s positive 2.0% return in September included Consumer Discretionary (+7.0%), Utilities (+6.4%), Communication Services (+4.5%), Industrials (+3.3%), Real Estate (+2.8%), Technology (+2.8%) and Materials (+2.4%). The underperforming sectors included Energy (-2.8%), Healthcare (-1.8%), Financials (0.7%) and Consumer Staples (+0.6%).

The markets remain cock-a-hoop about falling interest rates and expectations are high for a Fed repeat of their 50-basis point cut when the Federal Open Market Committee (“FOMC”) next meets in early November. There is a final FOMC meeting in the week before Christmas and it remains to be seen how the Fed will play out the rest of the year. The latest “Summary of Economic Projections” released by the Fed in September pointed to slightly easier policy over the remainder of this year than was being anticipated but guessing the magnitude of rate cuts at the next meetings will be the top sport for the market for final quarter of the year. Those “guesses” will be guided by data releases on employment and the US economy is never short of labour market news. To add to the excitement of the guessing game will be the frequent utterances from the many Federal Reserve Bank governors along with any news on the inflation front. That news is also not in short supply, and we will get consumer price inflation, producer price inflation and personal consumption expenditure deflators – all with a headline and a core variant. In short, there will be lots to keep the short-term market observers busy. For long-term investors, however, its best to just stand back from the noise and see the bigger picture. Interest rates are on the way down, inflation is largely under control, growth is still slow but will pick up in time and corporate earnings are growing albeit at a potentially slower pace in the third quarter. The corporate earnings base is broadening outside of just technology and drug company stocks and these factors all provide a strong tailwind for the equity markets. Valuations do pose something of a headwind, but ongoing earnings growth can work through those in time. Global conflict and the US presidential election add some uncertainty and risk to the mix, but the longer-term picture remains positive.