Financial Market Analysis: Key Factors and Sustainable Development Goals (SDGs)

Sustainable Development Goals (SDGs)

The Sustainable Development Goals (SDGs) are a set of global goals established by the United Nations in 2015. They aim to address various social, economic, and environmental challenges and promote sustainable development worldwide. In this financial market analysis, we will emphasize the significance of the SDGs and their implications for investors.

Key Factors in Financial Markets

1. The U.S. equity market remains highly distorted.

   Investors may want to diversify their equity portfolios to avoid over-exposure to megacaps in the S&P 500.

2. As fiscal spending surges and a reckoning looms, we expect gradual easing by the Federal Reserve, with a small risk of a rate spike.

   Investors should consider staying on the short-end of fixed income.

3. Global growth is picking up.

   Investors may want to look at commodities for global growth exposure.

U.S. Equity Market Distortion: Growth Dramatically Outperforms Value

The U.S. equity market, specifically the S&P 500, has experienced significant distortion. The performance of large-cap growth stocks has outpaced value stocks, reaching levels comparable to the internet bubble of 1999.

Growth/Value Distortion Reaches Internet Bubble Levels

Source: Morningstar. Data as of 17 July 2024. Past performance is not a guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index. Value represented by Russell 1000 Value Index. Growth represented by Russell 1000 Growth Index.

The dominance of mega-cap tech companies, such as Nvidia, has contributed to the distortion in the S&P 500 market cap index. Comparing different segments of the equity market, we observe that the Nasdaq 100 Index has led the market since 2014, followed by the S&P market cap index. Small caps, international stocks, and emerging markets stocks have underperformed.

Market Cap Weighted S&P 500 Index Doesn’t Always Rule

Source: New Edge, Cameron Dawson. RIA. Newedgewealth.com dated 14 June 2024.

Historical data shows that periods starting with overvalued growth stocks can lead to different market returns. While tech companies like Nvidia exhibit solid sales growth and profitability, their high valuations come with risks. Any tech-related issues or disruptions in the supply chain could significantly impact returns.

Nvidia Valuations Are High But Mixed in Historical Context

Source: Bloomberg. Data as of 22 July 2024. Forward P/E on 12-month basis (next 4 quarters), this is lower than 2024 calendar year.

U.S. Budget Deficit Nears All-Time Highs

The U.S. budget deficit has reached near all-time highs due to large fiscal deficits resulting from increased government spending. This has contributed to higher inflation rates and influenced the Federal Reserve’s decision not to ease monetary policies.

High Budget Deficit Despite Economic Boom and Low Unemployment

Source: MacroPolicy Perspectives/OMB, BLS/Haver. Any projections shown are for illustrative purposes only and are not intended as predictions of future results or events.

The high budget deficit poses challenges for the Federal Reserve in terms of interest rate cuts. To manage the debt, the government may need to implement tax increases and spending cuts. If these fiscal challenges are not adequately addressed, there is a risk of a spike in long-term interest rates.

Global Growth Picks Up

The global economy has entered a phase of expansion, with countries like India driving rapid growth. China’s growth statistics have been relatively weak, but progress is being made to resolve property issues. Other Asian countries have played a significant role in carrying global growth. This trend supports the demand for commodities, as evidenced by the rally in commodity prices during Q2.

Global Growth Back to Expansion

Source: Bloomberg. Data as of July 2024. Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction.

Key Takeaways and Investment Implications

1. Market distortion:

   Ensure that your equity portfolio is diversified and not overly concentrated in the S&P 500 market cap index. Consider including equal weight large caps, mid caps, small caps, and international stocks to spread risk and capture broader market opportunities. Rebalancing your equity portfolios is important to avoid overexposure to overvalued growth stocks.

2. Fiscal spending:

   Given the high interest rates on short-term fixed income, it may be wise to stay on the short end to mitigate the risk of a potential spike in long-term interest rates. This approach offers a safer return profile in the current fiscal environment.

3. Global growth:

   With global growth picking up, commodities could benefit from this situation, making them a potentially viable addition to a diversified investment strategy.

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Source: vaneck.com