Quarterly newsletter, September 2024

The Fed's fifty point cut

Volatility has continued into the new financial year, as equity markets respond to economic data and speculate on the timing of potential rate cuts. Volatility was supported by the unwinding of the yen carry trade in early August, causing the All-Ords (ASX500) to fall 5.80% over 2 days. Investors rushed to reduce exposure to one of the most lucrative investment strategies in recent years: borrowing the Japanese Yen at near-zero interest rates to buy prospective assets in other markets. The All-Ords recovered quickly as investors bought the dip. Australian equities are now trading around all time highs.

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In the US, the Federal Reserve cut rates by 50 basis points (bps), lowering the federal funds target rate to 4.75-5.00%. The 50bp cut was cause for debate as market pundits speculated the future health of the economy – traditionally, 50bp cuts have preceded or been in response to an economic downturn. Fed Chairman Jerome Powell cautioned that further cuts of this size look unlikely, and noted that “upside risks to inflation have diminished and downsize risks to unemployment have increased”.

Locally, inflation continues to trend down, with headline CPI now within the RBA’s target 2-3% band. Despite this, the RBA is taking a cautious approach to rate cuts, noting the impact of energy rebates. Prior to the print, RBA Governor Michelle Bullock warned the decline in inflation may be short-lived, ruling out a near-term rate cut. The RBA will be aware that if they delay rate cuts for too long, it risks tipping the economy into a technical recession.

Corporate margins are stable overall, supported by strong balance sheets and resilient revenue growth in sectors with structural tailwinds. In Australia, consumer spending is being supported by immigration, with prospective rate cuts serving as a catalyst for further growth.

Within the All-Ords index, we are cautious of large cap companies trading at historically high valuations. If we do see an economic downturn, and associated analyst downgrades, large cap stocks trading at large valuations may begin to underperform. We are also paying close attention to the relative performance disparity between ASX Banks and Materials – a relationship that may revert if we see more economic stimulus out of China.

Returns for the 2025 Financial Year (3 months)

  • All Ordinaries: 8,538.40, up 524.60 points, or 6.55%
  • Listed Property Accumulation Index: 82,830.30, up 9,738 points or 13.32%
  • 90 Day Bank Bills: 4.43%, down 0.45%
  • AUD vs US Dollar: 69.19c, up 2.45c or 3.67%
  • UK FTSE 100, 8,237.00 points, up 72.90 points or 0.89%
  • Dow Jones Industrial Avg: 42,330.15 points, up 3,143.95 or 8.02%

Guardian Investments Pty Ltd ABN 18 608 506 261 is a Corporate Authorised Representative of Guardian Associates Pty Ltd AFSL 238281. This page reproduces commentary published in September 2024 and is general advice only. It has not been tailored to your objectives, financial situation or needs, and the figures were current at the time of writing. Past performance is not a reliable guide to future returns. Seek personal financial advice before acting on it.