Monthly summary – May 2024

Artificial Intelligence and earnings trumped rates and politics. Even though worries over possible rate cut delays by central banks, and the increasingly uncertain political and geopolitical landscape weighed down on investor sentiment, equity markets overall rose in May, led yet again by technology stocks.

Interest rate setback

The stickier-than-expected inflation made for yet another setback to expectations regarding when central banks might lower their interest rates. In the US, consensus was lowered to one or possibly two cuts taking place during the fall of 2024; a far cry from the hopes raised at the beginning of the year. One Federal Reserve committee member even voiced the possibility of a hike. Whereas some central banks in Europe (Switzerland and Sweden) made cuts, the European Central Bank was generally expected to follow suit in June, but to then do nothing until inflation was down to its two percent target.

 Earnings season – better than expected

With the earnings season more or less over, the AI behemoth Nvidia released its Q1 earnings in late May. Once again, results surpassed estimates and the chipmaker’s shares rallied. After a more than 3,000 percent gain in the last five years, Nvidia is now the third-largest US corporation in terms of market cap. Otherwise, to sum up the first quarterly reports, outcomes were, on balance, better than expected implying that the world economy was humming along, even though regional differences were significant.

 Presidential election picked up momentum

The run-up to the US presidential election in November gained some momentum last month, not least because Donald Trump was found guilty in a New York court on charges related to the payout of “hush-money”. Democrats welcomed the conviction, while Republicans saw the trial as being politically motivated and generally continued to back Mr. Trump as the party’s candidate.

 General election called in the UK

In the UK, prime minister Rishi Sunak surprisingly called a general election on July 4th, half a year before what had been expected. With the Conservative party trailing Labor by tens of percentage points, investors began bracing themselves for a new, more leftist government. Having been in the doldrums ever since the Brexit referendum eight years ago, UK equities traded at a discount to many other developed markets.

 No improvement in Ukraine or Gaza

No improvement was seen in the two active war zones, Ukraine and Gaza. Following the recent Russian onslaught around Kharkiv, Ukraine responded with drone attacks on targets inside Russia, especially oil and gas installations. Despite increased international pressure on Israel, the IDF continued its operations in Rafah, aimed at destroying Hamas. The accidental bombing of a refugee camp led to massive protests around the world and several countries, including Norway, Spain and Ireland, decided to recognize Palestine.

Technology sector in the driver’s seat

In US dollar terms, the world index advanced in May. However, continued foreign exchange fluctuations meant that returns were again dependent on investors’ base currency. The increase in the index was almost entirely attributable to the technology sector (and to a much lesser degree to utilities), while most other sectors fared significantly less well, with energy and industrials trailing the most. Given its dominance in information technology, the US markets outperformed the rest of the world, with Japan and Hong Kong posting the worst returns. 

OUTLOOK

The timing of the first interest rate cut in the US has been postponed and many economists and strategists now see November as the earliest possible time for the cut to happen. A strong labor market combined with the lingering high inflation means that the Fed prefers to keep the interest rate at its current level for a while longer. There is considerable discussion about whether the present interest rate level is dampening economic activity sufficiently enough to help bring inflation down towards the two percent goal. It is impossible to know for sure, one reason being that the increase in interest rates already implemented takes time to affect the cost of dwelling. Doubters exist but they have no more data than anyone else to prove their thesis.

We see tendencies towards a slightly weaker labor market as well as lower inflation, which is why our assessment is that September, as the month for the first interest rate cut, is actually a reasonable guess. This means that it is quite possible to have a strong stock market during the summer, which is usually the case during the year of an American presidential election where the incumbent president is running for re-election. Although this is not based on a statistically valid sample, it is seen by many as a pattern validated by history.

Continued strong outlooks for the sector

Fundamentally, it is well founded for this particular year with good reports for the first quarter and continued high liquidity in the financial markets. For the healthcare sector, it is becoming particularly interesting. The second half of the year has good opportunities to be strong since last year’s profit development was marked by some cost pressure and was combined with relatively low healthcare production as a result of labor shortages in healthcare. It remains to be seen if the stock market will discount this already this summer or if it will wait until after the election. We’ll simply have to wait and see.