As the stock rebound looks set to continue, traders may want to ramp up their stop-loss levels accordingly. On behalf of investors, we have reviewed our mid-year outlook: global growth momentum has suffered recently, but investor sentiment has suffered far more, which sets the stage for an eventful autumn 2024. We have closed our calls on US duration and credit, downgraded communications stocks, and tweaked our JPY forecast. We also reiterate most of our calls and suggest that investors enjoy the ride.

Since mid-year, bourses have been about a mid-summer rally, but the Bank of Japan triggered a major glitch in early August. In the past ten trading sessions or so, global stocks have staged a major comeback. After a pause, they may try to attack and even surpass all-time highs. Yet traders who followed our suggestion to play the rebound should raise their stop-loss levels given that the upmove looks quite well advanced. For investors, we see this as a good point to review our calls for the mid year update. Quite frankly, the economy has disappointed – with some slowing in the US, as well as lacklustre dynamics in China. 

Yet the good news is that risk appetite collapsed far more than fundamentals suggested by early August. Today we know that some market internals, as in the yen carry trade, were behind this move. But the clear positive is that the stage is set for rotating into more cyclical areas of financial markets. Therefore, we stick to most of our earlier calls, such as ramping up some cyclical and mid-cap stocks, looking for non-US-driven emerging markets, such as China and India, and using gold as a structural beneficiary of lower rates and higher economic activity into 2025. 

In contrast, we took the opportunity to introduce some changes during the market dislocations earlier this month. In fixed income, we closed our long high grade/short high-yield call for the US and went back to neutral in terms of duration. Going forward, we think investors are best advised to use valuation-based rules for bonds (as in ‘sell below 4%, buy above 5%’) in the weeks ahead. In equities, we downgraded communications stocks to Neutral even before the market turmoil started due to quite a mixed earnings season. 

Next, in foreign exchange, we cut the JPY target slightly back after the recent policy mistake. This leaves us with the drivers for markets in the coming weeks: we expect an evermore US-centric market environment, as the US presidential election will likely take centre stage. Despite the fact that not much has changed in terms of uncertainties and probabilities around the scenarios, we are still confident that there is only one outcome that may move markets in a meaningful way. As the most important US election scenario for financial markets, we continue to assign a 45% probability to a Trump sweep, where the Republicans would win the presidency and secure a majority in both the Senate and the House of Representatives.

What about the global growth outlook? 

Global industrial expansion slowed significantly in July, interrupting the positive trend of the first half of the year. The path of an economic cycle is never smooth, which makes July’s set back difficult to interpret. Some monetary easing and a resumption of Chinese manufacturing exports are helping the global inventory cycle, leading to a bumpy and modest continuation of the cyclical recovery in the remainder of 2024. 

Global manufacturing expansion has been heavily dependent on US demand and the inventory cycle. Elevated geopolitical and global trade risks warrant higher inventory levels, and excess inventories were largely worked off by 2023, supporting solid demand from inventory accumulation. At the same time, political uncertainty in Europe, which is weighing on demand, and high interest rate levels are arguments against more inventory. The looming interest rate cuts in the coming months will help to mitigate these headwinds, while political uncertainty will remain a wild card. 

China’s manufacturing expansion remains the key driver of the global economic recovery, as weak domestic demand and a reluctance to engage in large-scale fiscal stimulus leave manufacturing exports as the only growth channel. Recent hiccups in export figures have contributed to the recent dip in confidence but may prove temporary as Chinese policymakers lack alternatives to maintain decent growth in an economy where consumers are highly indebted and reluctant to borrow and spend. 

We expect a bumpy and modest continuation of the cyclical recovery over the rest of 2024, driven largely by some monetary easing and a return of US demand and Chinese manufacturing exports.

What does this mean for investors?

For the reasons above, paired with our expectations regarding the US elections, investors should simply stay invested and enjoy the ride as much as they can. Stay tuned for a rather spectacular autumn season in 2024.