SUMMARY

August started with a spike in volatility. Despite the initial stress, stock markets increased during the month, with the world index up 2.5 percent, measured in US dollars. Several central banks have now signalled their intention to cut interest rates in the coming months. The US election campaign is in full swing with continued even poll numbers. Healthcare and consumer goods showed the strongest development during the month and seemed to be the least affected by the dissolution of the carry trade.

MONTHLY COMMENT

The beginning of the month was characterized by a sharp spike in volatility due to the unwinding of the yen carry trade. This had a significant impact on currency trading, affecting the US dollar in particular, and contributed to increased volatility across multiple financial markets. Despite this, the stock market saw a gain in August with the world index up 2.5 percent, measured in US dollars.

Central banks ready to ease

Key central banks, including the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BOE) signaled their intentions to lower interest rates in the coming months. This marked a clear shift from the recent period of higher borrowing costs. During the Jackson Hole symposium, Fed chair Jerome Powell indicated a pivot in monetary policy, hinting at a rate cut in September, stating that “the time has come for policy to adjust.” Powell emphasized that Fed policymakers were committed to supporting a strong labor market as inflation subsided. Overall, the market’s interpretation was that the Fed saw the need for a lower interest rate environment, in line both with declining inflation and signs of a weakening labor market.

The latest macroeconomic data of the month showed core PCE undershooting the Feds expectations for the third consecutive month, suggesting the possibility of downward revisions of future inflation forecasts. However, mixed signals persisted, with consumer spending and income growth remaining somewhat stronger than recent trends. Meanwhile, the savings rate dropped to 2.8 percent, the second lowest rate since 2008. This gave economists cause for concern that demand might decrease going forward, since they interpreted from the figures that the most financially vulnerable households were under increasing stress.

Olympic Games’ boost?

Inflation in the Eurozone fell to its lowest level in three years in August, bolstering the likelihood of further interest rate cuts by the ECB in September. This decline was mainly driven by lower energy prices, which brought inflation closer to the ECB’s target of two percent. However, the service component saw an uptick, likely due to higher spending during the Olympic Games in Paris. The market revised its expectations to six interest rate cuts before the end of next year, one more than projected in the ECB’s own forecasts.

Harris vs. Trump

During the Democratic National Convention in August, Kamala Harris was officially accepted as the party’s nominee. Harris saw a significant financial boost, raising more funds than her opponent, former president Donald Trump. Polls showed Harris slightly ahead, although the race remained close, particularly in key battleground states.

Polls for the US Senate and the House of Representatives was also difficult to predict and showed thin margins.

Strong month

With the exception of energy, all sectors rose during the month, measured in US dollars. Healthcare and consumer staples saw the strongest performances, as they were the least impacted by the carry trade unwind. Following the earnings season, many sectors exceeded expectations in both sales and earnings, which was an important factor behind the month’s overall gains.

REFLECTIONS FROM THE MANAGERS

As we hoped, August turned out to be a good month for the healthcare sector. The weaker dollar resulting from macro data in late July and August increasingly strengthened the thesis that we are finally reaching the point for the first US interest rate cut (September 18). The market recovered from fears of weaker growth related to the carry trade debacle at the beginning of the month, and moved quickly back to continued good ”risk/reward.”

Smaller companies slowly approaching the spotlight

Right now, it is relatively easy to be optimistic. The healthcare sector has delivered good reports and we note an encouraging stock market response. Overall markets have shown strength in August, a summer month that, historically, often tends to be weak. Interest rate cuts are now expected in many parts of the world. Inflation continues to decline, albeit at a slow pace. Many macro indicators also suggest that, hopefully, a recession in the US can be avoided, although this is still surrounded by uncertainty. Smaller companies are gradually becoming the focus of investor interest, although this is still at an early stage.

In line with how stock markets have often developed historically in presidential election years, we believe they could see a strong second half of the year. However, the period could deliver some surprises. Regardless of how political statements and proposals are perceived by market participants, the weeks ahead of an election is usually characterized by high volatility. A so-called ”sweep”, however, where one of the parties wins the presidency and both chambers of Congress, would probably complicate the stock market’s outlook on the economy and the perceptions of political risks likely to dominate the new administration. Shared power in Washington is often the foundation for political compromises, which in turn is often favorable for the stock market, even if compromises take time to work out. The economic cycle in Europe seems to be bottoming out at this point, but so far, the turnaround has not gained much momentum. Patience here is definitely needed.