Financial markets experienced volatility in recent weeks, as investors grappled with persistent inflation concerns, tightening monetary policies, and geopolitical tensions. While the recent decline has been quicker than usual, the size of the pullback is actually within the “normal” bounds of market behaviour. This is something that tends to be forgotten in the media.
Throughout 2023 and 2024, investors have experienced relatively smooth returns. Over the past 18 months, the US share market index (the S&P 500) only had one daily decline greater than 2%. Despite the relatively stable global economic environment, performance this smooth is not “normal.”
History suggests that, on average, share markets should have at least 5 daily declines above 2% per year, and a 10% decline every two years. Not only is the recent fall well within this “normal” range, but it comes after strong gains in the first half of the year, with the S&P 500 index still up around 10% (in local currency terms) so far this year.
On Wednesday, the Reserve Bank cut the Official Cash Rate (OCR) by 0.25% to 5.25% per annum and further rate changes are expected. They have cut rates because they expect inflation rates to come down further and stay between 1% and 3% over the medium term, with a focus on the 2% midpoint. The New Zealand stock market also reacted as a result of this cut: New Zealand’s stock market shot up by almost 2%, and the NZ dollar fell more than 1% against the United States and Australian dollars.
US inflation fell to 2.9% in July, which is a significant step for the Federal Reserve to cut interest rates at its next meeting in September. Both the DOW and S&P 500 close higher for the fifth straight day as easing inflation bolsters rate-cut hopes.
Navigating global equities: Insights from Stephen Arnold of Aoris Investment Management
We interviewed Stephen Arnold, the Managing Director and CIO of Aoris Investment Management (Aoris). Stephen’s views and insights are summarised below:
Market rotation: Investment focus has shifted away from large, dominant tech companies towards other businesses, making these companies more attractively priced. However, it remains uncertain whether this trend will continue.
Ideal stock characteristics: Aoris holds 15 businesses they believe will become more valuable over time. Their ideal stock characteristics include growing profitably, market leadership, growing faster than their peers, longevity time, and a conservative balance sheet. An example of businesses that meet these characteristics include L’Oreal, Accenture, and Microsoft.
Minimising portfolio risk: Aoris focuses on several key factors when evaluating businesses: long-term management strategy, customer acquisition and retention, competitive advantage and market share growth, and conservative financial management.
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