Investors’ Outlook: Nevermind the noise

Nevermind the noise 

The old stock market adage “sell in May and go away” proved more myth than mantra last month. Record highs were the common denominator among the world’s equity markets, leaving cautious investors feeling frustrated.

Stocks’ resilience mirrored the anticipation of interest-rate cuts that are poised to invigorate growth, economic data that boosted hopes for a soft landing, and strong company earnings amid optimism surrounding artificial intelligence (AI).

Against the backdrop of this bullish momentum, some investors have been debating whether they should brace for a consolidation, arguing that the recent stock rally we’ve witnessed makes the market more susceptible to profit taking. We concede that the road ahead may be choppy, but we maintain our constructive view on equities. The signs we’re getting from quarterly earnings is that corporates are in pretty good shape. If anything, the concern lies with government debt burdens.

And as discussed in last month’s issue, given the structural changes around inflation and geopolitics, we believe there’s a need for real assets, and it now seems like investors are increasingly coming to that understanding too, reflected in the record-breaking streak of assets such as gold, copper, and equities. Within commodities, copper prices are further supported by supply constraints amid ongoing strong demand from infrastructure spending, green energy initiatives, and power generation demand that’s in part being fueled by artificial intelligence. Similar supply-demand dynamics affect cocoa, where climate challenges play pivotal roles.

At our most recent Investment Committee meeting, we decided to refrain from making any changes to our asset allocation after previously sticking to our equity overweight, downgrading fixed income, and upgrading commodities.

The European Central Bank (ECB) started lowering interest rates at its June meeting, while refraining from committing to a particular rate path as it also raised its inflation forecasts. Meanwhile, the US Federal Reserve (Fed) remains in a holding pattern, carefully weighing the timing of its own monetary policy adjustments. The Fed’s cuts may arrive later than originally expected, but they’re coming closer, which means markets remain supported.

The 90s were known for many things: the eventual rise of the internet and the expansion of a number of companies that are currently massive brands (think Starbucks and Amazon, among many others), and the surge of hip hop and grunge music, including the release of Nirvana’s iconic album, “Nevermind”. But it was also a decade when the US economy withstood several rate hikes without tipping into a recession.

In this Investors’ Outlook, you’ll find a closer look at today’s economic environment compared with that of the 90s (we see parallels as well as important differences), a discussion on cocoa prices, and a careful scrutiny of AI-related stocks and valuations.

The traditional map of market wisdom is being redrawn and adaptability is key. Just like the music and technology that broke new ground then, those who dare to explore beyond conventional boundaries may uncover hidden gems.