A CHANGE IN MARKET REGIME?

23.09.2024 Last week the US central bank announced a half a percentage point cut in its official interest rate. Below we look at the implications and outlook for global markets.

Due to the fact that the United States is the world’s largest economy, the actions of the US central bank, the Federal Reserve, are crucial for both the outlook for the global economy and investor sentiment.

Last week the Federal Reserve announced a half percentage point cut in its official interest rate. By choosing a large initial cut (normal central bank practice is to move in quarter point increments) it is signaling that it believes it can focus much more on supporting economic growth than it has done in recent years. Furthermore, it communicated that this was the start of a significant easing of monetary policy with the official interest rate estimated to fall from 4.75 percent now to just above 3 percent by the end of 2025.

A US central bank focused on cutting interest rates to support economic growth (rather than trying to restrict it in order to bring down inflation) represents a big change in the environment for financial markets. Outside of technology, stocks markets have been characterized by risk aversion and uncertainty about the outlook for economic growth.

In share markets the types of shares that are likely to do well in a more risk positive environment are growth shares, cyclical shares and small/mid cap shares. In the income sphere bond prices have already risen to price in a series of interest rate cuts from central banks across the world. However good quality property and infrastructure shares still offer attractive yields and thus have scope to catch up with bonds.

It should be noted that interest rate cuts usually take about a year to translate into faster economic growth. So initial market moves will be based on the expectation of a more favourable economic environment in 2025.

● For information only. Investors should seek professional advice for their own circumstances before making an investment.

Categorised in: Uncategorised

This post was written by Robin