Investing involves the risk that your capital goes down as well as up; you may get back less than you invested. The commentary below is not intended as a recommendation for you to personally buy or sell any of the investments mentioned nor to take any investment action whatsoever.

With the end of the third quarter approaching and the beginning of an interest rate cutting cycle underway, now is a good time to reflect on markets and to publicly update our views and positioning.  

So far, 2024 has been a very good year for investors in the global stock market: it is up 14% year-to-date. This follows a return of 15% in 2023. There hasn’t been a major selloff in two years.  In sum, it feels pretty darn good to be an investor in the stock market right now. 

Why has the ride been so smooth? Partly it’s because 2022 was raucous and we have, since then, been riding a recovery as inflation and interest stabilised and fell. This is a much healthier overall environment and stock prices have come to reflect that.  

The good fortune is also because the global stock market consists of some truly excellent companies. ‘Big tech’ perhaps has its societal detractors but it’s very good at making money. Companies like Nvidia have benefited hugely from the investment in artificial intelligence. Even more staid companies, like Walmart and Costco, have harnessed the huge productivity-enhancing benefits of technology.  

The past few years have provided a compelling argument that higher inflation has been good for high quality companies because they can more easily raise their prices. Perhaps the biggest takeaway on a personal level is that owning stocks is one of the best ways to protect oneself from higher inflation.  

So… what happens next? 

Our view is that the stock market is poised for a ‘correction’ of 10-20% from its current level. Such an event would be completely normal and could occur without endangering the healthy ‘bull market’ that is currently underway.  

Predicting the timing and catalyst for such a correction is beyond me, although I could posit a few possibilities: more people than expected losing their jobs in the US, a Trump victory followed by indications of a serious tariff war and/or disappointing future profits from the ‘big tech’ firms that cause investors to more seriously question their relatively high stock prices.  

Looking further into 2025, a resumption of inflation risk is a factor that we are watching closely. If inflation were to increase meaningfully it would limit the ability of central banks to cut interest rates further. Yes, inflation can be good for certain companies’ profits but, like in 2022, it can take a while before the equity market figures out the winners and losers. 

There are, as ever, reasons to be bullish. For one, the US Federal Reserve took the aggressive option of cutting its interest rate by 0.50% last week, which may be a signal that it will not hesitate to support the economy – and stock prices – at future meetings. Just like in 2020 and 2021, cheaper money acts like a rising tide lifting all boats. Further aggressive cuts would provide significant support to stocks.  

So… what are we doing for clients? 

In our main strategies we have reduced our exposure to the stock market by about 10%. We are now ‘underweight’ stocks. This gives us more optionality to act if we get the selloff we expect but is not so ‘underweight’ that our clients will miss out severely if our view proves incorrect. This is prudent risk management and aligns with our longstanding, disciplined approach.  

So far we haven’t made any changes to our non-equity exposures. Here we are still moderately ‘overweight’ government bonds and continue to own ‘hedged equity’, both of which have done exactly what we need them to do so far. Government bond prices are approaching a level where we will likely reduce our exposure but, for now, they offer our clients a useful hedge against a potential stock market selloff and a return, net of fees and tax, that is commensurate with inflation. 

Our approach is not particularly complicated but with each passing year there is more evidence that it works well – TW Performance vs Peers. We are very proud of our clients’ performance since the inception of our benchmark strategies 4/5 years ago and our growing team is dedicated to doing their best to repeat this performance over the next 5 years. If you feel you might benefit from a review of your investments, please do get in touch.