Signia Invest Insights | December 2023
Market Review and Outlook
- It’s been a slow start to 2024 with markets experiencing a hangover from a very strong and inclusive Santa rally. The S&P 500 ended the year by posting 9 consecutive weekly gains for the first time since 2004. The rally, which started in November and was predicated on expectations for a dovish Fed pivot in 2024, gathered pace in December, as vindication from a surprisingly dovish December FOMC meeting helped turbocharge the year-end rally, which was one of the fastest advances ever for a major US index within a span of two months.
- The release of the Fed’s quarterly Dot Plot showed the median dot from officials pencilled in 75 basis points of expected rate cuts for this year, and Chair Powell, who has been somewhat neutral on his 2024 rate outlook until now, didn’t push back on the rate cut discussion either. In fact, Powell’s dot for 2024 was incrementally 50 basis points lower than his previous one in September, confirming in his press conference that participants no longer expected further hikes and that “we’re very focused on not making that mistake” of keeping policy tight for too long. Unsurprisingly, money markets have got carried away and have moved to price earlier and more aggressive rate cuts, with Fed funds futures moving to fully price a 25 basis point cut by the March meeting. It does strike me that, with US equity markets sitting near all-time highs and unemployment still close to historic lows, it feels like an odd time for a dovish signal to embark on a path of monetary easing.
- Nevertheless, December saw strong gains for investors generally across the equity and fixed income boards. The MSCI ACWI gained 4.7% to end the year up 20.1%, driven almost exclusively by the US markets (essentially the handful of Magnificent 7 stocks), which saw the S&P 500 and Nasdaq Composite post 2023 gains of 24.2% and 43.4%, respectively. European indices continued their weaker path with the STOXX 600 ending the year up ‘only’ 12.7%, yet still ahead of the anaemic FTSE 100, which eked out a remarkably disappointing 3.8% return for UK investors over the course of the year. The big surprise in December was Japan, where a previously solid Nikkei 225 stumbled, declining -0.1% during the month, as the Yen strengthened an impressive 5% against the US Dollar, albeit from a very weak base, but Japanese equities still managed to return 28.2% overall in 2023.
- Bond markets displayed particularly strong monthly performance with the global aggregate index up 3.4% to end the year up 7.1%, whilst global high yield bonds outperformed, returning 13.5% during the year. Not a bad result for fixed income investors in a year which has been fraught with risks and uncertainties, from aggressive Fed tightening to a regional banking crisis and then supercharged US growth in the third quarter. Whilst the market outlook that’s priced in for 2024 is now rosier, an easy ride for bond investors feels far too simplistic and somewhat optimistic given the lessons they’ve taught us over recent years as we continue the transition from an era of zero interest rates.
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