Q3 2024 Market Update

As we say farewell to summer and welcome autumn, inflation is cooling and central banks are beginning to cut rates. The third quarter of 2024 ended with healthy returns across most major asset classes, despite increased levels of market volatility.

In this edition, read expert insight about:

• Increased market volatility in Q3
• How the US election may influence global markets
• What Rachel Reeves’ Autumn Budget might have in store

Increased market volatility in Q3

August was a volatile month for stock markets around the world, which was influenced by a number of converging factors, including:

• At the end of July, the Bank of Japan (BOJ) announced an interest rate increase for the second time this year, bringing the rate to 0.25% – the highest level since 2008, and the BOJ didn’t rule out further increases later in the year.
• A short time later, the US Federal Reserve went against market expectations of a rate cut and instead held the interest rate steady.
• On Friday 2 August, the US jobs market report showed fewer jobs had been added than anticipated and unemployment rose.

On the back of this, major US indices experienced sharp falls, though the downturn was short-lived.

Taking the S&P 500 as an example, changes of 1% or more in the market value had been rare during Q1 and Q2 of 2024. Yet, in Q3 the US Index experienced far more volatility, as shown in the chart below.

Source: US Bank

Volatility is a key component of investing and the safest response is to remain calm and collected.

If you have a well-diversified, balanced portfolio and are investing with a long-term horizon, you’re well prepared to weather this type of short-term market fluctuation.

History shows that the imminent US election may cause less than a ripple

On 5 November, Americans will head to the polls to elect their next president.

While you might assume that election-year uncertainty could cause markets to be more volatile, history shows that this isn’t necessarily the case.

1. Rowe Price looked back at almost a century of historical data and found that elections don’t tend to have much effect on the volatility of the S&P 500, as shown below.

Source: T. Rowe Price

The same research revealed that volatility before the election and in subsequent months tended to be higher when the incumbent party failed to remain in the White House.

The research highlighted two further trends:

• When the incumbent party retained the presidency, volatility declined, on average, before the election and ticked up modestly afterwards.
• In presidential elections where the incumbent party lost, volatility increased significantly in the periods before the vote and then receded afterwards.

Only time will tell how the election race will play out.

Suffice to say, in past years, both presidential and midterm elections have failed to significantly disrupt financial markets. As such, adapting your strategy and trying to judge the markets could damage your progress towards your long-term goals.

The Labour Party will deliver its first Budget since 2010

On 30 October, Rachel Reeves will reveal details of the “tough decisions” the party will make to address the £22 billion “black hole” left by the Conservative government.

Whilst we don’t know what will be in the budget, here’s a brief rundown of the potential changes that may feature.

Inheritance Tax

Inheritance Tax (IHT) is currently paid by less than 4% of estates. In 2023/24, HMRC collected £7.5 billion in IHT receipts.

To widen the IHT net, Labour might abolish certain reliefs applied to agricultural property and businesses. Other possible changes, with wider implications, include:

• Increasing the rate at which IHT is paid
• Lowering or scrapping the nil-rate and residence nil-rate bands
• Scrapping HMRC’s gifting allowances or changing IHT reliefs.

Capital Gains Tax

You usually pay Capital Gains Tax (CGT) on the value of profits that exceed the “Annual Exempt Amount”, which is currently £3,000.

On profits that exceed the exemption, you’ll usually pay:

• 10% if you’re a basic-rate taxpayer (or 18% on profits from the sale of a residential property that isn’t your main home)
• 20% if you’re a higher- or additional-rate taxpayer (24% for a residential property that isn’t your main home).

The chancellor might decide to align CGT rates with Income Tax. If so, you could find that profits in excess of the Annual Exempt Amount may be taxed at 40% or even 45% if you’re an additional-rate taxpayer.

Pensions

Currently, 20% pension tax relief is automatically applied to your contributions at source. Higher- and additional-rate taxpayers can claim additional relief via self-assessment.

There has been talk that Rachel Reeves may announce a single rate of relief, possibly at 30%, which could disadvantage higher- or additional-rate taxpayers.

Tax-free cash entitlement could also be in the chancellor’s sights. Pension savers are currently entitled to take 25% of their total fund tax-free on retirement. This may be changed by applying a cap – £100,000 has been suggested – after which you may not benefit from any further tax-free cash from your pension, and withdrawals will be taxed at your marginal rate.

Watch this space

Look out for our Budget update, which will arrive in your inbox soon after the announcement, helping to break down the key changes.

We’re here to help

As financial planners, we’ve helped clients weather many economic storms over the years, and that’s something my team and I are proud to continue doing.

Markets may rise and fall, but your investment goals should remain the same, and it’s our job to help you achieve them. For almost 20 years, clients like you have trusted us to provide honest, independent advice in a friendly and professional way.

If you have any questions about anything you’ve read in this update, please don’t hesitate to contact your financial adviser, who’ll be happy to give you all the support you need.