Originally published at: Monthly market roundup – September 2024 – InvestEngine Insights
Welcome to the latest edition of our monthly market roundups.
September was a month packed with important interest rate decisions around the world. The Federal Reserve, Bank of England, European Central Bank, and Bank of Japan all met during the month to decide on their respective interest rate policies, with the biggest surprise coming out of the US. These decisions had knock-on effects for sterling, which in turn affected equity returns for sterling-based investors over the month.
In the off beaten section we look at how you can use AI to make millions from Spotify (albeit illegally), why knowing the future won’t help you when investing, and why dating apps are exacerbating wealth inequality.
Headline inflation continues to fall
September saw UK inflation holding steady at 2.2%, which was in line with market expectations, but still above the Bank of England’s target of 2%. Core inflation rose slightly, driven by higher airfares, while fuel prices and restaurant charges eased. Inflation in the services sector, however, rose from 5.2% to 5.6%, which led the market to predict that the Bank of England would keep rates on hold at their meeting later in the month.
In the US, headline inflation fell to 2.5%, down from 2.9%, which paved the way for the Federal Reserve to begin cutting interest rates. Core inflation remained steady at 3.2%, with rising housing costs offset by declines in energy prices.
The jumbo rate cut
The biggest market news story in September was the Fed’s “jumbo” 0.50% rate cut – reducing its upper rate from 5.50% to 5%. Going into the meeting, the markets were undecided whether rates would be cut by 0.25% or 0.50%. This marked the first cut for the US since the start of the COVID pandemic, and indicates the Fed is aiming to prevent any potential slowdown in the US economy and job market after keeping rates at their highest level since 2001 for over a year.
The S&P 500 closed at a record high the following day as investors bet the Federal Reserve’s jumbo half-point interest rate cut would help deliver a soft landing for the US economy. This news helped propel the US stock market to its 42nd all-time high of the year during September. Lower interest rates are generally considered positive for stocks because they reduce companies’ debt burdens, encourage consumer spending, and nudge investors towards riskier assets.
In the UK, the Bank of England held interest rates at 5% after inflation remained steady at 2.2%, but indicated it may lower borrowing costs again as soon as November. The decision came after it cut borrowing costs by 0.25% at its last meeting. In a signal that another rate reduction is likely as soon as its next meeting in November, the BoE said it would take a “gradual” approach to loosening policy, assuming there are no material changes in the economy.
September also saw the European Central Bank decide on their policy rates, and decided to cut interest rates by 0.25% to 3.5% in response to falling Eurozone inflation and signs that the bloc’s economy risks grinding to a halt.
The last major central bank to make an interest rate decision in September was the Bank of Japan. At their previous meeting at the start of August, the BoJ surprised investors with a hike from 0.10% to 0.25%, which roiled global markets and caused the Nikkei to fall more than 10% in a single day, over fears of the global yen ‘carry trade’ unwinding. After causing such global market turbulence (the impact of which was thankfully short-lived), at their September meeting, the central bank took a more austere approach, holding rates steady at 0.25%. The bank pointed to a moderate recovery in the economy but warned that “high uncertainties” remain in the outlook for activity and prices.
Equities hampered by the pound
September was a mixed month for equities. The pound strengthened by 1.9% over the course of the month against the dollar, which detracted from returns for sterling-based investors. This meant the US market, despite making several new all-time highs in September in USD terms, only rose by 0.1% when priced in sterling.
Similarly for Europe, the European market fell 0.4% in Euros, but 1.6% in sterling terms. While the UK market, hampered by the strong pound, also fell 1.6%, emerging markets had an excellent month, rising 4.9%.
This was a result of China’s central bank reducing a key interest rate as part of a broader effort to stimulate their economy and ensure the country meets its annual growth target, as well as reductions in the reserve requirement ratio, which determines how much capital banks must hold in reserve, and lower mortgage rates for existing homeowners.
Bond yields steady
With the increased confidence surrounding the Bank of England’s rate cutting cycle, buoyed by headline inflation data coming in as expected, short-term bond yields fell slightly over September from 4.1% to 4.0%.
Longer-term yields, which tend to be more sensitive to expected long-term inflation rates, were largely unchanged during the month, remaining at 4.0%.
Sterling strengthens
The BoE keeping rates on hold pushed sterling higher in September, as currency fluctuations are affected by short-term interest rate differences between countries. With the Fed and ECB both cutting rates, sterling strengthened by 1.9% against the USD, to finish the month at $1.33, and by 1.1% against the Euro, to finish at €1.20.
Off the beaten track
How to use AI and bots to make millions on Spotify
How Spotify works is that the users pay a flat fee, no matter how much music they listen to, while the artists get paid based entirely on how often people listen to them. One Spotify user sought to take advantage of this, realising that if you sign up for Spotify and listen a lot, you can generate more revenue for artists than you pay for your subscription. You effectively get to allocate more than your subscription fee to the musicians you listen to most often.
Michael Smith created hundreds of thousands of songs with artificial intelligence, and then created thousands of accounts using automated programs to stream his own AI-generated songs billions of times. Smith obtained more than $10 million in royalty payments through his scheme (before being arrested).
Knowing the future won’t help you
This is the main conclusion from some fascinating research by Victor Haghani and James White of Elm Partners. They built a game, which you can play here in which traders were shown the front page of the Wall Street Journal (with market prices blacked out), and asked how much they would wager on the direction of the S&P 500 and the 30-year Treasury the day before.
Starting with a notional million dollars, a group of 118 experienced traders placed bets on 15 different days, taken by Elm Partners at random from the last 15 years. The results were fascinating. The players guessed the direction of stocks and bonds correctly on just 51.5% of the roughly 2,000 trades they made. They guessed the direction of bonds correctly 56% of the time.
Their findings showed that even with foreknowledge, even the professionals only guess right only a bit more than half the time. The average return they made was only 3.2%, while half lost money and one in six went bust.
Dating apps are exacerbating wealth inequality
Three economists at the St Louis Federal Reserve have been researching the marriage market — and the results are both interesting and surprising.
They found that the preference to marry someone of similar or higher income and education levels has steadily increased. In other words, wealthy, well-educated people increasingly tend to marry other wealthy, well-educated people. And over time that has had a sharp impact on inequality. So much so that because people have increasingly been marrying someone more like themselves, they estimate it can account for approximately half of the increase in household income inequality between 1980 and 2020.
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