October Market Update and Q4 Outlook

What’s moving markets - cuts and comebacks

Weak US economic data stoked recession fears during September, pushing Developed Market equities down across the board. However, China gave a huge boost to Emerging Market returns, with stimulus measures there appearing to hit the mark with investors.

In the US

The Federal Reserve’s dual mandate means that they need to keep an eye on both inflation and unemployment. Maintaining a healthy jobs market as inflation approaches its target level is undoubtedly hard - and made even harder by the lagged effect of rate cuts and the unusual dynamics of the post-Covid labour market.

New US jobs numbers at the start of the month were lower than expected at 142,000. Data from the previous couple of months was also revised down, and the number of job openings sat at 7.7m, the lowest for three years. All of this points to a slowing labour market and a slowing economy. Employers are less concerned about hiring and employees are less likely to get pay rises. 

In response, the Fed made a bold 0.5% rate cut, surprising many. Could this be a sign they worried that they had taken too long? Interestingly, there was a dissenter within the committee that is usually unanimous.

ECB and stubborn UK inflation

Meanwhile, the European Central Bank continued on their rate cutting cycle, but the Bank of England held steady. Data from mainland Europe shows growth expectations are being downgraded and powerhouse economies such as Germany may well be in recession already.

UK inflation remains sticky, driven by services inflation that is stopping the BoE cutting rates further. While headline inflation remained at 2.2% (within a comfortable tolerance of the 2% target), services inflation rose to 5.6%, hindering rate cuts. With wages still climbing, there is concern of inflation reigniting - bad for consumers and embarrassing for central bankers.

China boosts Emerging Markets

Emerging Markets stole the spotlight in late September, taking what would have been a negative month into comfortably positive territory. Stimulus measures in China – and importantly the rhetoric around them – finally seem to have hit the mark with investors. The domestic China A market was up around 25%, marking one of the biggest weekly gains in its history.

Sentiment towards China has been incredibly poor, with the market decoupling from other EM regions and performance going backwards for the last three years. Political tension, a failing property market, massive youth unemployment and a population that wants to save instead of spend has weighed heavily on economic growth and equity returns. Various attempts to stimulate both have fallen short over recent years.

Whether this latest upturn is the start of a sustained recovery or another false dawn is still to be determined, but the magnitude of the market reaction suggests something could be different this time. With both monetary and fiscal support pledged, and policies directly aimed at reviving the stock market, there is a clear desire to address the current issues and meet the 5% GDP growth target for the year.

With recent gains, Emerging Markets have almost caught up with the US this year, underscoring just how quickly market sentiment can shift.

Q4 Market Outlook

Central banks have started cutting interest rates, easing the path for a ‘soft landing’

The timing, magnitude and speed of cuts may vary, but the direction looks clear.

Focus shifts from inflation to unemployment

As inflation approaches its target, focus shifts to the resilience and sustainability of growth.

Recession fears, recovery in sight

The cyclical slowdown is raising recession fears, but strong corporate and household balance sheets suggest resilience and potential recovery ahead.

Fiscal recklessness in developed markets is ballooning

Debt to GDP ratios of over 100% are not uncommon and the US budget deficit is nearing $2 trillion despite very low unemployment. While worrying, investors remain tolerant, for now.

Signs of market rotation

Leadership in U.S. large-cap tech is fading, while new opportunities are emerging across different regions, sectors, and market caps—suggesting healthier market diversity.

Heightened volatility from political risks

As the US election is nearing its peak, investors should focus on long-term growth and valuations, tuning out short-term hype. History shows that politics typically doesn't drive long-term returns.

Emerging Markets (EM) offering scope for upside surprise

EM central banks can cut rates to boost domestic spending and GDP growth. China is starting to announce stimulus measures, with more expected. Despite their potential, EM assets remain undervalued and overlooked.

Disclaimer: Any information contained within this article is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Journey Invest Limited accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.