Market Outlook

Market update

The inflation outlook has been a key debate for markets and policymakers, but the focus has shifted as inflation globally has continued to fall. Many central banks have now switched their focus to supporting growth and labour markets. Seven of the G10 central banks have now cut interest rates, including the European Central Bank, Switzerland, Canada, New Zealand and the United States - where the US Federal Reserve cut by 0.5% in September and a by a further 0.25% at the beginning of November.

In Australia, we are at a different phase of the cycle - inflation is still too high and economic growth weak. The Reserve Bank of Australia (RBA) met in the at the beginning of November and left rates on hold at 4.35%. This was widely expected, although in its statement the RBA said that while inflation has “fallen substantially” from its peak in 2022, underlying inflation “remains too high”.

Many investors interpreted Governer Bullock’s recent statements as dovish, which gave rise to the hope that Governor Bullock may not in fact raise rates and could even cut rates sooner than expected. All will depend on how the data plays out in coming months.

On a positive note, there’s hope that economic growth may improve when tax cuts and income growth flow through to households, allowing them to spend more.

What did it mean for investment performance?

Australian and international share markets rose over the September quarter, and the year. This meant investment options with higher allocations to growth assets, like shares, did well. The US share market has been particularly strong, on the back of better economic growth than expected, and a boost in confidence from the 0.5% interest rate cut in September.

It’s worth noting that the world’s biggest global technology stocks, Microsoft, Amazon, Apple, Meta, Nvidia, Alphabet & Tesla (known as the Magnificent 7) performed very strongly over the year to June 2024 and continued to deliver for shareholders over the September quarter. They rose by almost 44% for the year to 30 June 2024 and their size and extraordinary performance meant they contributed significantly to the performance of the US and global equity markets. In fact, for the year to 30 June the S&P500 rose almost 23%, but without the Magnificent 7 would have risen only 14%.

The performance of these mega-cap technology stocks is in large part due to the growth in AI – companies exposed to and necessary for its ongoing development have benefited enormously. Nvidia for example, which was little known outside tech circles until two years ago briefly leapfrogged Apple and Microsoft as the most valuable company in the world. Nvidia sells the graphics processing units (GPUs) and software crucial to training and running AI logarithms.

Bond yields (the interest rate on Government bonds) were lower, which meant bond prices were higher, and returns were also positive for the quarter and the year.

Market outlook

It’s been a positive start to the 2025 financial year, but global tensions remain high, particularly in the Middle East, and depending on what happens, this could cause volatility in markets.

The US election has dominated headlines over the past months. Despite the widespread belief that the election would be closely fought, Donald Trump scored a decisive victory, winning not only the Presidency, but also the popular vote, the Senate and the House of Representatives. This puts him in a very strong position to pursue his policy agenda.

The initial reaction of financial markets has been largely positive. The US share market rose strongly, although bond yields (the interest rate on Government bonds) also rose, because markets expect Trump’s policies to lead to higher inflation and higher government borrowing. When yields rise, the price of bonds fall, resulting in lower returns, and that’s what we’ve seen.

It’s a case of wait and see what the data reveals and how the RBA responds. As always, it’s impossible to predict with accuracy or consistency how markets are likely to react to different pieces of news.

When investing, no one has a crystal ball or can predict with accuracy what’s likely to happen in the future. It’s normal to keep a watch on the factors which could affect markets in the short term and consider how they might influence returns. However, it’s also true that focusing on long-term economic drivers, sticking to a long-term strategy and maintaining a diversified portfolio can help deliver long-term returns.