Monthly markets review - October 2024

Philip Robotham

A look back at markets in October when equities fell, although Japan was a notable outperformer. Fixed income markets also retreated in the month.

The month in summary:
A look back at markets in October when equities fell, although Japan was a notable outperformer. Fixed income markets also retreated in the month.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions, and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US
US shares ended lower in October amid uncertainty ahead of the presidential election and ongoing doubts about the path of interest rates. Disappointing quarterly updates for some large companies also weighed on market returns.

At sector level, the healthcare, materials and real estate sectors experienced the steepest falls in the month. The financials sector was a standout positive performer with investors reacting positively to earnings updates from several banks. Communication services also performed well.

The advance reading from the Bureau of Economic Analysis showed US GDP grew by an annual rate of 2.8% quarter-on-quarter in Q3. This was a slight slowdown from the 3.0% growth rate in Q2. US annual inflation, as measured by the consumer price index (CPI), was 2.4%, compared to 2.5% registered in August. The Federal Reserve’s preferred measure of inflation – the personal consumption expenditure index – came in at 2.1%. This is close to the Fed’s 2% target but the “core” measure moved up to 2.7%.

Non-farm payrolls saw a surge in job growth in September, with 254k jobs added compared to a revised 159k in August. The reporting of higher frequency labour market data in October was affected by hurricanes across parts of the US, with a port strike also distorting some jobs figures.

Investors continued to expect the Fed to cut interest rates by 25 basis points (bps) at its October meeting, following a 50 bps cut in September. As the month drew to a close, all attention was on the 5 November presidential election with the polls still very tight.

Eurozone
Eurozone shares fell in October amid some concerns about growth and uncertainty around the US presidential election outcome. The weakest sectors included information technology, consumer staples and real estate. Industrials and communication services sectors were the only sectors to register a positive return for the month.

With the Q3 earnings season ongoing, there were some weaker corporate earnings from several large companies, including some in the information technology sector. In consumer discretionary, quarterly updates from several of the carmakers as well as some luxury goods companies disappointed the market.

Data from Eurostat showed eurozone economic growth was 0.4% quarter-on-quarter in Q3, accelerating from 0.2% growth in Q2. Spain and Portugal registered the fastest growth rates. Eurozone annual inflation was estimated at 2.0%, up from 1.7% in September.

The European Central Bank (ECB) cuts interest rates by 25 basis points in October. However, the uptick in inflation and faster pace of economic growth may imply less likelihood of rapid rate cuts to come. That said, more recent data indicated that business activity contracted again in October, with the composite purchasing managers’ index (PMI) coming in at 49.7, albeit a slight improvement from 49.6 in September.

UK
UK equities fell over the month and UK small and mid cap (SMID) equities underperformed. Both larger companies and SMIDs were negatively affected by the mixed near-term external macroeconomic outlook. This was reflected in the poor performance seen by many sectors exposed to global industrial end markets.

Meanwhile, a late in the month sell-off in UK assets piled further pressure on the more domestically focussed SMIDs. This sell-off followed concerns that the UK budget has worsened the longer-term UK economic and interest rate outlook. While the Chancellor’s spending plans drove upgrades to near-term UK growth and inflation forecasts, they were judged to have limited long-term benefit to the economy’s productive capacity or “supply side”.

As a result of concerns about the nature of the new administration’s fiscal, or spending policies – and the long lead times for any subsequent regulatory reforms to improve the supply side – there was a repricing in long-term government borrowing costs. This occurred in anticipation that UK interest rates will need to be higher for longer in order to offset more persistent inflationary pressures and maintain price stability as the economy grows.

This deterioration in the longer-term macro-economic outlook was also reflected in sterling weakness (albeit against a strong dollar) and made for a dismal end to a tough October. The sharp turn in sentiment occurred despite generally positive near-term UK economic data (including news inflation was back below the Bank of England 2.0% target).

Japan
The Japanese equity market continued to experience higher volatility but rebounded to generate a positive return of 1.9% for TOPIX Total Return index in yen terms. The Nikkei 225 rose more strongly, by 3.1%, indicating that the market’s rise was primarily driven by large cap stocks. The weakness of the yen supported large cap exporters such as technology, autos, and machinery stocks. Financial stocks also rebounded after a setback in the summer.

Recent political turmoil in Japan had both positive and negative impacts on financial markets. Initially, the market reacted negatively to the news that Mr Ishiba had unexpectedly won the leadership election of the Liberal Democratic Party (LDP), the ruling party. Ishiba immediately called a snap election upon his appointment as prime minister, raising concerns about further instability of the Japanese political situation. The LDP and its coalition lost their majority in the general election held on 27 October.

However, this news had already been priced in before the election. The market regained momentum toward the end of the month, anticipating an expansionary policy direction as a result of the general election while Ishiba’s administration will remain in place.

Macroeconomic conditions in Japan remain solid, as confirmed at the Bank of Japan’s (BOJ) meeting on 31 October, where no policy changes were made. The BOJ’s statement hinted that they might take action at the December meeting, but this would still depend on market conditions and economic developments. The semi-annual corporate earnings results season began later in the month, and initial earnings figures remained solid, although the currency fluctuation will become a highly variable factor as we approach the end of Japan’s fiscal year in March next year.

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