Markets In A Nutshell — For July 2024

July witnessed a sharp slowing of the US jobs market and a stock market rotation. Conviction in big tech seems to finally be wavering, with investors piling into small-cap companies and interest rate-sensitive stocks playing catch-up. This led to the largest one-month outperformance in over 20 years for the leading index of US small-cap shares, compared to the large-cap, tech-heavy Nasdaq 100 Index.

The US central bank maintained interest rates at their recent highs, but cited weakness in the labour market as a sign of a cooling economy. This opens the door to a much-anticipated easing cycle, with the market now expecting an almost 100% probability of a US interest rate cut in September.

Interest rate-sensitive asset classes outperformed, with bonds and global property stocks advancing. Developed market equities were broadly flat — with growth stocks particularly weak — as investors grew cautious on the AI-driven tech narrative. Even Warren Buffett’s Berkshire Hathaway slashed its mammoth stake in Apple by nearly 50% during the quarter.

Commodities, including oil, broadly lost ground. The Bloomberg Commodity Index closed 4.0% lower, as the market weighed the impact of weaker Chinese demand against supply issues arising from tensions in the Middle East. In contrast, gold continued to shine — reinforcing its status as a safe haven for nervous investors.

Against this backdrop, the Foord global funds both generated positive returns, with both funds having low allocations to big tech in the US, and invested in a wide range of high quality businesses trading on valuations that provide investors with a margin of safety.

Looking ahead, investor nervousness is justified, with US economic indicators — including credit card delinquencies — falling short of expectations. The fact that the US avoided a recession in 2023 helped keep the faith that the US central bank would engineer a soft landing for that economy — where high interest rates cause inflation to slow to acceptable levels without tipping the economy into recession. However, US economic resilience owes much to outsized US government spending, funded by hefty government borrowings.

The US yield curve remains inverted, with longer maturity bonds still yielding less than shorter maturity bonds — a reliable historic indicator of recession. The sharp rise in US unemployment is another recessionary indicator. With the dashboard now lighting up with multiple warnings, investors in US equities cannot disregard the very real risk of permanent capital loss from still-elevated valuation levels. At the time of writing the market is responding to such nervousness, with the Nasdaq bourse experiencing a technical correction (a fall of 10% or more from recent peaks).

Allocating assets sensibly often means investing away from the crowd, ignoring market noise, having realistic expectations and remaining patient. While it can be challenging to appear misaligned with prevailing market trends, adhering to these principles helps navigate market volatility -- the Foord global funds have lagged peers and narrowly-driven global markets for the last 18 months for precisely these reasons, weighing on the returns of the South African multi-asset funds that invest into them. 

Amidst the unfolding market jitters, investors should take comfort that we are prepared for weaker global growth and a market correction, and have been positioned for this scenario for some time to protect investor capital as well as achieve meaningful, inflation-beating returns over full market cycles. By focusing on long-term value and prudent risk management, Foord funds are well equipped to both navigate future market uncertainties and capitalise on emerging opportunities.