A merry end to the year for investors
Markets continue rising as US Federal Reserve Chairman Jerome Powell indicates interest rate cuts for 2024. The Dow Jones Industrial Average registers a record high.
Key global central banks keep interest rates unchanged, as inflation continues to fall and the employment market cools.
Data released during the month shows that UK GDP declined 0.3% in October, with production and construction the worst hit.
Mortgage arrears in the UK increased to the highest levels in six years in the third quarter of 2023. Despite this, the Halifax house price index showed that UK house prices recovered again in November, with a 0.5% monthly increase.
Credit rating agency Moody’s cut China’s outlook to ‘negative’.
The US House of Representatives approved an impeachment inquiry into President Joe Biden based on allegedly benefitting from his son’s business dealings.
The price of Gold reached a new all-time high, surpassing the previous record from 2020 during the COVID-19 pandemic.
Tesla recalls two million cars in the United States due to insufficient safety controls within the vehicles' AutoPilot system.
Federal Reserve Chairman Jerome Powell delivered an early Christmas present to investors when he announced that the Fed would start cutting interest rates in 2024. The Fed Open Market Committee decided to keep rates unchanged in December but the Fed’s so-called dot plot showed that most officials expected a 75 basis points cut to rates by the end of the year. This represented the first dovish shift in the Fed’s stance since they started raising rates in late 2021 and markets took it as the end of the Fed’s tightening cycle.
Powell drove home that point, saying the Fed did not want to restrict the economy longer than necessary. “We’re aware of the risk that we would hang on too long,” Powell said, referring to waiting too long to cut rates. “We know that’s a risk and we’re very focused on not making that mistake.”
Inflation readings continue to moderate and the employment market is cooling but Powell's words still took markets a little by surprise, especially as at the start of the month he appeared to push back on market expectations for aggressive rate cuts, calling it too early to declare victory over inflation. US Treasury bond yields fell sharply on the perceived pivot with the two-year yield recording its biggest daily decline since the collapse of Silicon Valley Bank in March – meaning the capital value rose rapidly. Bond yields around the world fell in sympathy. UK government bond yields fell particularly sharply, with the rate on the 10-year bond falling from 4.2% to 3.5% over the month.
Expectations of falling interest rates during 2024 also caused equity markets to jump higher, with the Dow Jones Industrial Average registering a record high during the month. In recent months, the index has been buoyed by the prospect of a resilient US economy, ebbing inflation, and strong corporate earnings. It certainly seems that beaten-up stocks that are tied to the health of the economy have come back to life and the very stocks that have been hit by high rates are starting to recover. The Invesco S&P 500 High Dividend Low Volatility ETF produced a particularly strong performance. The ETF has a high allocation to sectors such as utilities and real estate, which are often referred to as “bond proxies” given their stable and predictable cash flows. The ETF, which we have recently introduced to our models, gained 4.8% during the month.
The feel-good feeling in equity and bond markets spilt over to other assets. Gold achieved an all-time high and the price of Bitcoin continued to rise, helped by expectations that US regulators will approve the listing of exchange traded funds that will directly track the price of the cryptocurrency.
One market that continues to be in the doldrums are Chinese equities. Sentiment towards China soured further as credit rating agency Moody’s cut the country’s outlook to ‘negative’, citing persistently lower growth and the property sector crisis as key downside risks. The oil price also continues to slide, with Brent crude oil falling below $75 a barrel for the first time since June despite a brief jump on worries about security disruptions in the Red Sea.
As we move into 2024, we continue to favour bonds, which should do well against a backdrop of central banks cutting interest rates. Within the equity allocation, we maintain a tilt towards parts of the market that do well when interest rates fall, and the economy slows.
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