Market update: A strong year end for the markets in 2023, what now?
This February 2024 market update is brought to you by LGT Wealth Management
Markets finished 2023 on a high, with equities spurred on by optimism following the Federal Reserve (Fed)’s dovish pivot at its year-end meeting.
Investors and markets rapidly priced in numerous rate cuts in 2024, leading to careful language from central bankers, who cautioned about the timing and pace of the cuts.
Bond yields have risen moderately this year as rate cuts may be pushed back to later this year. Still, US equities led the charge, with the S&P 500 hitting all-time highs throughout the month before paring back and finishing January up 1.6%[1].
Sentiment was dented by lingering concerns of US commercial real estate. The so-called “Magnificent Seven” stocks, which include Meta, Apple, and Amazon, rose nearly 2% in January, having been up nearly 6% intra-month. This comes despite Tesla’s disappointing earnings after it warned of slowing growth in electric car sales and increased competition from China leading its shares down 25%.
On the other hand, Microsoft’s revenue surged as the company is poised to benefit from the ongoing artificial intelligence boom. It rose a remarkable 5.7% in January. 10-year Treasury yields popped up from 3.88% to 4.15% before coming down again to 3.94% at month-end[2].
Geopolitics remains at the forefront of investors’ minds. Mid-January, the US and UK launched a round of strikes on Yemen’s Iran-backed Houthis as the armed group continues to target commercial ships in the Red Sea.
Houthis’ attacks on ships, which began in November, have disrupted maritime trade, and pose ongoing problems to shipping. The price of Brent oil moved above $80 a barrel at month-end.
Trade disruption could potentially keep inflation elevated, giving central banks pause for thought. The Fed, the Bank of England (BoE) and the European Central Bank (ECB) all met in January, and while all three held rates steady, each have different hurdles to cross before they begin cutting rates.
Given the poor economic growth outlook in Europe – the Manufacturing Purchasing Managers Index (PMI) data showed business activity contracted for the eighth consecutive month[3] – putting further pressure on the ECB to ease policy.
The ECB, which emphasises its data dependency, will likely be the first to cut rates, now expected in April. The Fed is closer to its inflation target but wants further evidence that the job market is cooling before cutting rates.
While US Job Openings and Labor Turnover Survey (JOLTS) has declined from its peak, it still shows a relatively high number of job openings[4]. The tight labour market may keep inflation high, but recent data allows them to gradually reduce rates should inflation continue to edge down.
Similarly, the BoE echoed this patient approach, as UK service inflation remains elevated compared to other western countries. Nevertheless, the BoE is now projecting 1% of rate cuts by year end with inflation declining below 3%.
China has had a weak start to the year, weighing on investment sentiment further. The Hang Seng fell 8.7%[5] and the country reported sluggish PMIs figures for January[6]. This has prompted authorities to commit to a larger fiscal and regulatory intervention to boost the economy.
However, in a contentious US election year, international buyers appear hesitant to allocate to China despite cheap valuations.
So far, Donald Trump’s victories in New Hampshire and Iowa have given him a strong start in the race. He is well on the path to winning the South Carolina caucus in February and securing the Republican nomination, setting the stage for a rematch with President Joe Biden in November. It is unclear whether his legal challenges would halt his path back to the White House.
The British will also vote in a general election this year, though the outcome appears far more clear-cut. Conservatives face dire polls and a possible 1997-style defeat to Labour, although lower deficits have provided an opportunity for Conservatives to offer a sweetener come the Spring Budget.
As always, there are many factors that could affect markets in 2024. More people are headed to the polls around the world this year than any other time in history[7], and geopolitical tensions are here to stay.
Nevertheless, history shows staying invested in US presidential election years is prudent, since the incumbent president often has a wide tool kit at his disposal to ensure US growth remains robust.
[1] Bloomberg
[2] Bloomberg
[3] S&P Global
[4] Bureau of Labor Statistics
[5] Bloomberg
[6] China Federation of Logistics and Purchasing