Inflation Down, Markets Up
The last 2 months of 2023 we had an exciting rebound to the stock and bond markets. The rebounds were equated to strong year-end global stock and bond market returns. These gains did not come without pain of significant sell offs throughout the year as the Federal Reserve’s interest rate policy seesawed on inflation data and economic uncertainty. In the US we can thank the Mega Market Movers Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Netflix, Nvidia and Tesla for pushing the markets higher despite volatility factors. Overall, developed markets outperformed emerging markets that carried the uncertainties of China’s real estate market, the Russian Ukraine war, and strife between Israel and the Palestinians. The energy sector struggled with oil prices declining despite production cuts. This was a strange and rare occurrence, maybe an occurrence that may have never happened in my lifetime when there was conflict in the Middle East. The policy to cut the strategic oil reserves in the US is believed to have had the price decline impact we saw in late 2023. Outside of the Mega Market Movers, interest rate sensitive stocks in the real estate and consumer discretionary sectors posted gains as the expectations of future interest rate cuts permeated investors’ hopes to relieve the economic credit crunch.
Let’s not forget the Eurozone that posted strong 4th Quarter results. Concerns for higher interest rates, a mirroring of US investors unease, was relieved as Central Banks pivoted on expectations that inflation has run its course and further interest rate hikes may not be necessary. What is more likely are interest rate cuts, as inflation numbers that peaked at 10.1% in 2022 deflated to 2.4% in November 2023. Like in the US, information technology and real estate coupled with industrial and materials stocks, whose values are based on future cash flows and earnings, led the markets higher. What is Europe without its good old friend the United Kingdom. How are its markets surviving past the Brexit? Well, small and midsized companies’ stocks led the way to higher market peaks as UK stocks performed strongly. This factor paired with larger UK company stocks whose broad international exposure benefited from the rebound in global stocks, all of which shared the same common economic advantage. The common economic advantage was that the Federal Reserve and Central Banks and the Bank of England may be done with raising interest rates. Industrial and financial sectors prospered this quarter while domestic exposure UK large company stocks struggled as the sterling prospered against the dollar.
In Japan the hand can be used as a knife, and Japanese markets cut through the 4th Quarter of 2023 squeaking out a gain with strong monthly market performance in November. Japan’s market returns were greatly influenced by the US, as Japanese investors hinged their investment decisions on weaker US inflation and the possibility of interest rate cuts. Growth and small cap stocks outperformed large value stocks. Business sentiment growth firmed up in the manufacturing and non-manufacturing sectors as interest rate easing policies took their full effect. Asian markets advanced for the same reason global stocks rose; inflation may have peaked, and future rate cuts are possible. The rise of Artificial Intelligence (AI) moved chip makers stocks in this region of the world higher. The news of which renewed the craving of investors in Asia for riskier assets, excluding China, who’s markets fell amid concerns over weaker economic growth. Chinese investors recoiled over the concern that the Chinese government stimulus actions would not be enough to motivate growth in their economy. Let’s not forget that the financial system is still shaking from its real estate crisis keeping investors in China sidelined.
China was the loser in the emerging markets sector. The remaining partners in the emerging markets sector performed strong despite rising bond yields early in the quarter. The sector underperformed developed markets.
What’s up with bonds? Let’s say this, Asset Class is calling it a comeback. After 2022’s worst performance in over 40 years, the Bond market, the conservative risk adjust return asset class for risk adverse investors has started to climb its way out of the pit of losses that shook conservative investors. As global interest rates rose, pricing of fixed income investments (bonds) declined, which eroded principle on conservative investors’ portfolios. Higher fixed income yields have been nice for income investors, but declining valuations have been tough on account values. However, what goes up must come down. The end of 2023 was the beginning of a role reversal for the Federal Reserve and Central Banks around the world to shift course and consider stopping their rising interest rate policy. They also began to consider lowering rates in the future based on weaker inflationary numbers to what some perceive as the traction of monetary tightening (raising interest rates) to fend off hyperinflation. At this point it looks like progress has been made to reel in inflation to a comfortable level. What does this mean for bond investors? Lower future interest rates and price appreciation for individual bonds and bond funds invested in.
The past year has reminded us that the markets are fundamentally nonlinear and variable. This irregularity stresses the importance of diversification, as it can add significant value to investors investment outcome. As we enter 2024 and you prepare for what lies ahead, we cannot emphasize enough the principle of “staying the course” and adjust as necessary through rebalancing. We welcome the opportunity to assist in assessing how market and economic conditions are impacting you, your family, and those you know. Please do not hesitate to contact us to set up a meeting to discuss how we may be useful to you. Thank you for the opportunity to serve you.
Sincerely,
Your team at Renew Family Wealth
