Cooling growth and narrow performance
Cooling growth
and narrow performance
Whilst the weather attempts to remember that the meteorological summer has arrived, there is a suggestion that in the US economy the pace of growth may be cooling. After a few months where the economic data came in better than expected recent updates have proved to be underwhelming, as reflected in the economic surprise indices (the difference between official economic results and forecasts) produced by Citi and Bloomberg.
The quandary for investors is that the slightly softening environment for economic activity appears not to be filtering through to the analysts, who remain upbeat for the outlook for profits at least for the larger US companies (represented by the S&P 500).
Analysts appear more circumspect when it comes to the profits outlook of smaller US companies, so maybe it’s no surprise that the large companies have started to outperform in recent weeks, compared to the mid-sized companies represented by the S&P 400. The outperformance of large companies is even more pronounced when compared against the smaller companies, as represented by the Russell 2000. Big is best seems to be the motto for profits and equity market performance of late, which is a reprise of the performance in 2023.
Recent economic data in the US has been worse than expected, suggesting that the US economy may be cooling
Source: Artorius, Bloomberg
May 2024 saw a return to large cap dominance in US equity markets, and the continuations of lacklustre performance of smaller companies
Source: Artorius, Bloomberg
When breaking down the performance of the US equity market (S&P 500) for the year to the end of May, Nvidia alone accounted for 32% of the 11% return. Nvidia’s rise in 2024 of 121% is staggering. But as a cautionary tale, yesteryear’s darling Telsa has fallen 28% over the same period and is down 56% from its 2021 highs. Whilst we suggest that Nvidia’s fundamentals are more robust than Tesla’s were, the valuation of Nvidia at 42x forward price to earnings ratio (a ratio of the current share price and forecasted earnings per share) does suggest that investors are reliant on Nvidia’s ongoing leadership in the AI chip arena. The dominance of the larger companies in terms of performance has left the larger companies with significantly higher valuations. As long as the profits keep getting delivered then investors may continue to be tolerant of higher valuations, especially if interest rates rise no further or indeed decline if the policymakers perceive inflation to be yesteryear’s problem.
The sticky inflation problem in the UK: political choices
Inflation has fallen over the past year across the UK, US and Europe. Politicians are keen to champion their inflation busting credentials before electorates but much of the decline of inflation can be attributed to the fading of the energy price shock of 2022 (that was triggered by the Russian invasion of Ukraine).
In the UK, wage inflation has eased, but not to the same extent as in Europe and the US. Indeed, the global recruitment company, track pay offers via their recruitment activity. UK employers are offering higher wage growth than in other countries. This pattern is being seen in the ‘official’ economic data, where the wage component of inflation remains higher in the UK than in Europe and in the US.
This may be a consequence of the rise in the ‘living’ or minimum wage enacted by the current government. The April 2024 uplift of 9.8% to the minimum wage may also be lifting wages of workers higher up the pay scale.
The Indeed Wage Tracker reflects the wage growth of job postings: it suggests that wage inflation remains quite elevated in the UK
Source: Artorius, Bloomberg
The independent experts at the Institute for Fiscal Studies (IFS) found that when the minimum wage was increased between 2016 and 2019, wages rose for many workers. Naturally those on the lowest wages experienced the highest boost to wages, but those in middle incomes also enjoyed a higher wage growth. There was also a squeeze in terms of many more workers ending up on the minimum wage as more employers adopted that as the basic wage, whether in care or retail, which may be a contributory factor to staffing shortages in the NHS and other care settings.
One wonders if higher wage inflation is what the country needs, as higher wage inflation tends to lead to higher inflation, and higher interest rates. For an economy crying out for higher investment, lower interest rates coupled with targeted spending plans around productivity and infrastructure (clean water, transport, health) may translate into better economic growth.
Europe leads the way in cutting rates
Central Banks will be delighted to see the easing of inflation which has opened the door to interest rate cuts. This will be especially so in Europe where economic growth has been slow for the past 12 months. The interest rate cut from the European Central Bank (ECB) on Thursday was widely expected, and is indicative that policymakers in Europe are comfortable in their expectations that the moderating wage backdrop will enable further falls in inflation in coming months.
Interest rates have been cut in Europe: the last to rise and the first to fall
Source: Artorius, Bloomberg
The joy of elections
In the UK, with manifestos yet to be published, the lucky electorate are seeing unverified claims and counter claims over taxes and spending. Whilst the shape of these are unknown, most serious commentators (like the IFS) acknowledge that public spending is likely to be cut further and taxes raised. The gap between the Conservatives and Labour may be less to do with how much, but rather who pays. When we gain insight into the plans of the next potential government, we will update our thoughts. This will be especially the case if changes to pensions and inheritance tax are proposed. For our clients and their families these are likely to be keenly felt and adjustments to our wealth planning advice may be required in light of actual announcements.
Gerard Lane
Chief Investment Officer
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Important Information
All expressions of opinion reflect the judgment of Artorius at 7th June 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions.
Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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