The Inside Track – August Insights

31 August 2024

Welcome to the third edition of The Inside Track!
As we close out August and welcome Spring (and the daisies in Cape Town) there’s a renewed sense of optimism for what lies ahead.

Mark Twain once noted that history doesn’t repeat itself, but it often rhymes. This sentiment rings true for the Federal Reserve’s interest rate policy, which has been on a remarkable journey since March 2022, when the Fed embarked on an unprecedented series of rate hikes.

But – Finally, it seems we’ve arrived at a pivotal moment!

In a decisive speech at Jackson Hole, Federal Reserve Chair Jerome Powell made it clear: “The time has come for policy to adjust.” While the direction is set, the timing and pace of interest rate cuts are still under discussion. With the Fed’s September 17-18 meeting approaching, we are likely on the verge of seeing the first rate cut since 2020.

Lower interest rates not only offer relief to consumers but also herald a significant shift in the financial landscape, creating fertile ground for new investments. This is an opportune moment for investors to consider moving cash into growth assets. On a global scale, retail bank deposits are at record highs, and South Africa is no exception, with over R1.8 trillion sitting on the sidelines.

Let’s hope this downward move in interest rates serves as the catalyst to unlock this vast potential.

Market Indicators

Returns % (to 23 August 2024)

Global Market News

• The Federal Reserve’s rate-setting committee released minutes from its last meeting before Chair Jay Powell’s speech at Jackson Hole on Friday. Market expectations now reflect a 35% chance of a 50 basis point cut in September, while a 25 basis point reduction has a 65% probability
• Gold prices surged to a record high of $2,509.65 due to expectations of a Federal Reserve rate cut, increased geopolitical tensions, and strong central bank buying. The price has risen over 20% this year
• Iron ore continues to face pressure due to concerns about a global surplus, with low-grade spot prices hitting their lowest level since 2022
• The unexpected interest rate hike by the Bank of Japan prompted investors to exit carry trades, where they had borrowed yen at low rates to invest in dollar-denominated assets for higher returns – the markets all bounced back
• UK unemployment unexpectedly dropped to 4.2% as companies increased hiring, signaling underlying strength in the UK economy
• Globally, retailers and manufacturers are advancing their year-end orders due to concerns over a worsening trade war between China and the USA

South Africa

• The South African financial regulator (FSCA) opposes any plans to mandate that pension funds(prescribe assets) invest in government-approved assets, as such measures could jeopardize market returns
• In July, CPI inflation fell to 4.6% year-on-year (0.4% month-on-month) from 5.1% in June, coming in below the Bloomberg consensus of 4.8% year-on-year
• August saw the JSE Top 40 index hit a record high, driven by positive US economic data that eased recession fears and increased confidence in the local economy
• Citi has upgraded its forecast for South Africa’s GDP growth to 1.2% this year and 2% next year, attributing the improvement to the two-pot retirement reform, lower inflation, and anticipated interest rate cuts that will boost consumer spending. The US multinational also projects fourth-quarter inflation at 4.1% and expects a 75-basis point rate cut in total over the next three monetary policy meetings to enhance household consumption
• Demand for commercial and residential space in Cape Town’s central business in 2023 district led to new property investments totaling R7.285 billion, more than double the previous year’s investment value

Food for Thought

• Matt Scharff set a new world record for the longest putt at 154 yards, equivalent to 140.8 meters
• Maria Branyas Morera, the world’s oldest person, passed away this week in Spain at the age of 117. Born in the US in 1907, she lived through two world wars, Spain’s civil war, and survived COVID-19 at 113 ( puts a new spin on retirement planning)

• The US holds 81% of the $19 trillion market capitalization of the global tech sector
• It took 11,800 years for the global population to reach 1 billion by 1800. However, in just over 200 years since then, the population has already exceeded 7.9 billion. An 8 fold increase.

Quote for the Month

“In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it’ ( Peter Lynch)

In other words, save diligently and persistently until your money starts working for you, making you the employer and your money the employee.

Chart of the Month

As technology fuels more innovation, the current boom could be just the tip of the iceberg—or could it be the iceberg that sinks the Titanic wave of returns we’re all enjoying? Where do we go from here? Only time will tell.

Wrap-Up: Tip for your Financial Wellbeing

Market corrections are a normal part of investing and healthy for markets, so don’t let casual opinions or conspiracy theories influence you.

The recent 8% pull back on the S&P 500 from its July peak is nothing out of the ordinary. Historically:

• 5%+ pullbacks happen more than three times a year.
• 10%+ corrections make their annual appearance.
• 15%+ declines show up every other year.
• 20%+ bear markets occur every 3-4 years.

These fluctuations are as predictable as the next headline about market doom and gloom.

To put this into context (see chart below), missing the market’s best days can have a significant impact on your returns. For example, missing the top 40 days over a 22-year period would have reduced your total return by 533%. This illustrates the challenges of trying to time the market and underscores the value of staying invested.

I hope you found the mailer valuable. As usual, if you have any questions or need assistance, I’m just a call or a click away.

I look forward to connecting with you at the end of September for our next update. Here’s to hoping September brings positive news and exciting developments

Kind Regards
Robert Taylor