The Waiting Game: VanEck’s 2024 Q3 Summary 

Please Note: This report was created and provided by VanEck.

Andy Warhol once said, “You need to let the little things that would ordinarily bore you suddenly thrill you.” And that is what markets have been doing this past quarter, every percentage point outside of consensus, and every basis point change has been thrilling markets. But if you look back over the past quarter, even the past half year, the minimal changes in the data would normally bore market participants.

It’s what lies beneath that markets are waiting for, and the market is hoping the data will indicate what that could be, and in what form. By the end of 2024, more than 80 countries, and more than half the world’s population will have been involved in an election. The outcome of many is uncertain, except perhaps the UK general election. What is unknown is the number of seats the Tories will lose, could the Liberal Democrats be the opposition party?

Politics aside, markets must also endure the landings central banks around the world are trying to manoeuvre. The US Job Openings and Labor Turnover Survey (JOLTS) in June, came in below expectations and the long end of the curve dropped, all but eliminating the no-landing scenario. The US Federal Reserve (Fed) will be hoping the US consumer and US business earnings can help them navigate the soft landing they covet.

In Europe, despite inflation being well above target the European Central Bank (ECB) has already cut rates. This is in response to some European economies already falling into recession. Locally, analysing the GDP numbers indicates that we are headed for a recession too.

Global carbon futures were the best-performing asset class over the quarter reflecting positive political sentiment, particularly in the UK. Emerging markets equities benefited from a weaker US dollar, while US equity rose on the AI boom.

The IT sector was the star globally.

Mid-and small-caps weighed down Australian equities. Strength in the financials sector, particularly the big banks, ensured that the local market posted only a narrow loss over the quarter. A new rate regime and a weaker currency dragged down Japanese equities and that was the worst-performing equity market last quarter.

Waiting is hard, and waiting for outcomes you cannot anticipate is much harder. No one knows the outcome of November. No one knows which direction inflation will move next and each geography has unique inflation issues. Central bank divergence is happening.

For the second half of 2024, investors should continue to approach risk assets selectively.

For Australian equities, we would caution against over-exposure to companies deriving their earnings from households and focus on earnings resiliency, strong balance sheets and positive free cash flow. Earnings season will be a confession for businesses on profit margins and, importantly, how interest rates and inflation have impacted businesses. On a relative fundamental basis, emerging markets in both debt and equity complexes, offer a greater risk premia. We could still see the US dollar come off and gold climbing to new heights. Despite a strong quarter, gold miners are still undervalued relative to the price of gold, and we think strong cash flows should see them continue to outperform the yellow metal into the backend of 2024.

Charlie Munger once noted, “Waiting helps you as an investor and a lot of people just can’t stand to wait.” We think now is a time to wait rather than trying to time the market. Peter Lynch would have us remember, “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.”

“The right word may be effective, but no word was ever as effective as a rightly
timed pause.” — Mark Twain

Sweating the small stuff

Another quarter, another three months of markets tracking every wiggle of US price and growth data. And, in terms of what has emerged, there has not been a lot of change.

In the meantime, bigger things have been afoot below the US macro surface and geographically away from the US. This includes real macro risks here, in Australia.

Looking at the US inflation number, the market did get ahead of itself in the last quarter of 2023, when it appeared it was falling faster than expected. The first quarter’s number was a nasty surprise, and the most recent print was one of these little wiggles. It seems as if inflation has stalled. So, absent a meaningful US downturn, inflation will remain a significant distance from the Fed’s two per cent target. While the extreme COVID supply ‘’pig-in-a-python” surge has passed, underlying tightness remains.

The past quarter has also seen some slowing in growth indicators. Both first-quarter GDP and, if you squint, labour market data have been marginally soft. This probably, in part, reflects lagged impacts of (market) interest rate back-ups in the second half of last year.

And the rest of the softish data has been the usual short-term interplay between expectations and actual. This is noticeable in sentiment-driven indicators. For example, the University of Michigan’s preliminary April Consumer Sentiment Index dropped to 77.9 from 79.4 in the previous month and was lower compared to the median estimate by economists of 79. The sentiment index implied that consumers estimated prices would climb at an annual rate of 3.1% year-on-year, up from the 2.9% expected a month earlier, higher than earlier in the year.

Later in the month, Q1 2024 preliminary annualised quarter-over-quarter GDP came in at 1.6%, well below expectations of 2.5%, while the Core Personal Consumption Expenditures Index was up 2.8% year-over-year versus estimates of 2.7%.

Another factor suggesting downplaying quarter-by-quarter wiggles is the likely COVID hangover on seasonal adjustment – essentially a sophisticated moving average.

Not the small stuff

More broadly, there has been little reason to expect a slowing in the US. With fiscal spigots still open and real incomes modestly gaining, the economy for the most part, seems to be coping with interest rates at current levels.
US equity markets have been sideways, at best, if you remove the big companies benefiting from the AI revolution. Meanwhile, the market’s assessment of the Fed’s rate expectations looks fair. The Fed has made it clear they’d like to (modestly) ease but, into election season, the data has not justified it.
Of course, the election and the aftermath of it, is one of the things in the “not the small stuff” (NTSS) category.
It seems markets don’t seem to be interested in the outcome of the US election yet, or at least don’t know what to do about it, or indeed have an idea which way it could go so it’s difficult to hedge.
Beyond the US, macro looks better. While China macro dynamics remain opaque, and its government seems determined to salami slice its policy response, PMIs across the rest of the globe are suggesting better times ahead.

On top of this, Europe has already seen some rate cuts.

With euro area inflation still comfortably away from target, the ECB cut was surprisingly early, perhaps reflecting fears of weak growth and/or the interaction of politics and government finances. If the former, we will not see another cut until autumn at the earliest. The latter is, of course, another from the NTSS category.

Over the years, when financial markets have been faced with political or geopolitical event risk, it has shown a propensity to ignore, ignore, ignore and then panic.

Or to panic early, then get complacent and then get bored.

There are a few valid reasons for this. Affairs of the state and geopolitics are not areas of market expertise; even if markets are worried, it’s not always clear what, if any, worthwhile or cost-effective hedges are available – finally, the Chuck Prince effect, “as long as the music is playing, you’ve got to get up and dance.”

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