Insights

We’re seeing a rotation, not a sell-off.

Originally published on September 20, 2024, by Fidelity International.
Written by Henk-Jan Rikkerink, Global Head of Solutions and Multi Asset, and Patrick Graham, Senior Investment Writer.

Highlights

• A difficult path for central banks
• The Fed strikes back
• Global risks and concerns

Was August just August? It seems not entirely. A jerky market correction in the middle of the U.S. holiday season for once has been followed by another in the altogether more serious territory of September. 

There are reasons. 

Whatever brand of landing you have your money on, the economy is returning to earth after five years in which abundant government support kept the global wheels turning. At the moment, we believe recent weaker data points are more likely to indicate a soft patch rather than a serious downturn, but investors are reacting, and we are watching growth and labour market indicators closely for signs of further deterioration. 

The overall picture is far from bleak. Markets and the global economy have proved consistently resistant since the pandemic, and consumers all over the world are still spending. We believe the global economy is not headed for an imminent recession and see signs that we have a rotation more than a sell off on our hands. 

Here are our three themes for the final quarter of 2024.

A bumpier path

Importantly, the slowdown is still within striking distance of a soft landing. Central banks have had to put the hammer down to defeat inflation, and the overwhelming evidence of recent months is that it has been largely tamed. We expect it will be higher and more volatile than it was through the quantitative easing era, but the stagflation risks of last year look to have been successfully abated. 

The price of that is that the U.S. job market is gradually weakening, and U.S. consumers are running out of steam – or, more accurately, savings. We are watching very closely for signs of further damage. Across the Pacific, China’s problems are also still a long way from solved, and more action from the authorities will be required to support both the government’s growth target and the structural change they desire.

The Fed strikes back

September’s cuts in U.S. and other interest rates offer hope for a smoothing of the road. The scale of further monetary easing this year is still hanging in the balance, but policy makers are reacting, and freed from the fear of higher levels of inflation, they will continue to do so.

In China, we are beginning to witness a new round of incremental easing after the summer’s Third Plenum meetings, including cuts in interest rates. More economic support is required in the final months of the year to alleviate the challenges from a weak property market, strained local government finances and subdued household income growth and consumer confidence.

The direction of travel is clear: we are heading for a cycle of further monetary and government support that will seek to cushion any bumps in the economy. Investors are adapting to a drop in rates, and our quant models are no longer advocating a pro-risk stance. We will look to take advantage of any market dips or peaks in election uncertainty as prices move toward a Fed-inspired cyclical upturn. For now, U.S. mid-caps and emerging market government bonds are two of the riskier areas that we believe will perform well in the current environment. 

Global concerns

The wild card is a broadly more complex set of geopolitical risks. We were not the only ones to note a year ago that 2024 would be the biggest year for elections and political risk in decades. Successes for the far right in Germany and France have sent tremors through European politics that threaten to hamper EU decision-making further. The conflicts in the Middle East and Ukraine roll on, with no end in sight, and the U.S. election beckons on November 5. Policy towards China and trade afterwards will be important, as will the shape of fiscal policy at a time when the reining in of long-abundant liquidity on markets has become a reality. 

The structural themes of the past year still seem relevant. The commercialization of AI technologies will continue to develop at pace, governments are pouring billions into electricity grid upgrades, and health care is both a good defensive and long-term theme. We are in a mid/late-cycle environment, with some key unknowns. This usually produces positive returns, albeit with higher volatility. We still believe a soft landing is most likely, but as asset allocators, it is important to be nimble to take advantage of opportunities as they arise.