Monthly Report - August 2024 - Analysis & Investment Strategy

Market Analysis – August 2024

August was a turbulent month in the markets. After a period of weakness in early August, equity markets recovered much of their losses in the latter part of the month. Our expert, Alexandre Gauthy, analyzes the trends in the markets in August 2024.

United States:

In the United States, the three main indices had a mixed month. The S&P 500 slightly increased by 1.5% over the month, mainly supported by the performance of large technology companies. The Nasdaq posted a gain of 2.3%, driven by optimistic forecasts for the earnings growth of semiconductor and artificial intelligence companies. However, the Dow Jones ended the month down 0.7%, due to concerns in the industrial and banking sectors, where economic outlooks and loan losses began to weigh on investor confidence.

Europe:

In Europe, equity markets experienced modest variations. The German DAX ended the month with an increase of 0.8%, thanks to a stabilization in the manufacturing sector. The French CAC 40 fell by 0.4%, with concerns over risks in the real estate market weighing on financial stocks. Tight financial conditions and weak loan demand have limited growth prospects, particularly for banks and companies exposed to high levels of debt.

U.S. and European Stocks:

The euphoria of recent months gave way to panic at the beginning of August. Some indices fell by 10% within a few days following concerns about the health of the U.S. economy, which resurfaced after the publication of a disappointing July employment report. This report indicated an increase in the unemployment rate and was compounded by weak data from the manufacturing sector. The second driver of the stock market correction was the strengthening of the Japanese yen after the Bank of Japan unexpectedly raised interest rates at the end of July.

Markets then rebounded when the Bank of Japan ruled out the possibility of further rate hikes as long as markets remained unstable, and due to the publication of some economic data in the United States that calmed recession fears.

The situation also improved regarding inflation and U.S. monetary policy. Inflation figures for July were in line with expectations, signaling a continued easing of inflationary pressures. A significant event of the month was J. Powell's speech at the annual central bankers’ meeting in Jackson Hole. The Fed Chairman emphasized that the cooling of labor market conditions was undeniable, and the Fed was not seeking further deterioration in the labor market. Acknowledging the risks of a further increase in the unemployment rate, the Fed Chairman stated that the central bank would do everything in its power to support a strong labor market.

Interest Rates:

The key event of the month was the annual central bankers’ meeting in Jackson Hole. J. Powell sent a clear signal that the Fed would not welcome further deterioration in the labor market. While a first rate cut in September is fully priced in, the question is whether the Fed will cut rates by 0.25% or 0.50%. The extent of the move will depend on economic data released by then, including the August employment report, which will be decisive.

Bonds:

Bond markets recorded positive performances in August due to a drop in long-term interest rates. Indeed, growing fears of recession and the more conciliatory stance of the Federal Reserve led to a drop in bond yields. The decline in yields was more pronounced at the beginning of the month in the United States than in the Eurozone. In the Eurozone, service inflation remains too high, tempering market expectations for future rate cuts by the European Central Bank.

Commodities:

Oil prices rose by 4% in August, with concerns about global supply being exacerbated by the extension of production cuts by OPEC+. Brent crude ended the month around $88 a barrel, with worries about declining inventories in the United States and geopolitical tensions in the Gulf putting upward pressure on prices. Natural gas also recorded a significant increase, driven by weather forecasts indicating a colder-than-average winter, prompting investors to bet on increased demand.

Precious metals, notably gold, rose in August. Gold increased by 3% to reach $1980 per ounce, as investors sought safe-haven assets amid growing geopolitical uncertainty and fluctuations in the stock markets.

Conclusion and Investment Strategy:

The resilience of equity markets during August was largely based on expectations of a soft landing for the global economy. However, risks remain high: an escalation of the conflict in Ukraine, a stronger-than-expected resurgence of inflation, or a negative surprise in the U.S. labor market could lead to disorderly adjustments in asset prices.

Banks, despite still favorable loan margins, are starting to feel the impact of increasing loan losses. The real estate market remains a concern, particularly in Europe, where declines in the value of residential and commercial properties increase risks for financial institutions. Additionally, the rapid decline in loan demand continues to weigh on growth prospects.

In summary, August 2024 was marked by a certain resilience of equity markets amid a complex macroeconomic environment and persistent geopolitical tensions. However, the risks of economic deterioration, particularly in the real estate and credit sectors, remain an important concern for the coming months.