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Markets and Economy
When doves yell: Fed loudly signals a September rate cut
Minutes from the July FOMC meeting were surprisingly dovish, and Federal Reserve Chair Jay Powell suggested a likely policy shift in comments from Jackson Hole.
This is a hyper rate-sensitive environment given the aggressive tightening by many Western central banks.
I’m optimistic that policymakers will remain vigilant in 2024 and quickly react to any issues that arise from their past tightening.
I believe the “fear of missing out” will accelerate in early 2024, leading cash-heavy investors to move into stocks and bonds.
Happy New Year! It’s January, which means it’s time to offer predictions for what the new year may bring for global markets in 2024. But first, it’s important to reflect on what we learned over the previous year — and there was no shortage of lessons learned about markets, the economy, and central banks. So I’ll start by reviewing my five key takeaways from 2023, and then offer five things I expect to see in the year ahead.
o Stocks. Chinese stocks disappointed due to the economic concerns I mentioned above, but overall, global equities gained more than 20% last year.2
o Bonds. Global bonds experienced gains for the year, with European and US high yield bonds as the standouts.3
o Commodities. Commodities posted losses, but gold was a juggernaut last year with demand helped by geopolitical risk buying, central bank purchases, and falling rates later in the year.4
In summary, and quite obviously, 2023 was a good year for markets — a balm for the wounds created by the annus horribilis that was 2022. If 2022 was captured in a country music song title, I believe it would be “How Can I Miss You If You Won’t Go Away?” But I definitely don’t feel the same way about this past year. If 2023 were captured in a country song title, I think it would be “If You Leave Me, Can I Come Too?”
In other words, 2023 was a good year, and I don’t think most of us would be eager to start 2024 if we thought the investing environment would change.
Now the first days of 2024 have unfortunately been more challenging. That is a reflection of anxiety and confusion around how much the Fed will cut rates this year. This has been fueled by some hawkish “Fedspeak” as well as some recent data.
But as Dallas Fed President Lorie Logan explained in a recent speech, “Restrictive financial conditions have played an important role in bringing demand into line with supply and keeping inflation expectations well-anchored. We can't count on sustaining price stability if we don't maintain sufficiently restrictive financial conditions."5 This helps to explain why we have been hearing hawkish talk.
While I think some concern and volatility will persist, I believe data over the next several months will provide greater clarity that the Fed will cut rates significantly this year, which should be supportive of equities and fixed income. In other words, I think the first half of 2024 will largely be a continuation of the last few months of 2023 albeit with more volatility.
Date |
Report |
What it tells us |
Jan. 8
|
Eurozone consumer inflation expectations |
Measures consumers’ expectations of future inflation. |
Eurozone retail sales |
Measures consumer demand. |
|
Eurozone unemployment |
Indicates the health of the job market. |
|
US consumer inflation expectations (NY Fed) |
Measures consumers’ expectations of future inflation. |
|
US consumer credit |
Reports outstanding credit extended to individuals. |
|
Jan. 9
|
Japan Consumer Price Index |
Tracks the path of inflation. |
German industrial production |
Indicates the economic health of the industrial sector. |
|
Jan. 10 |
China outstanding loan growth |
Measures loans extended to consumers and businesses. |
Jan. 11
|
US Consumer Price Index |
Tracks the path of inflation. |
China Consumer Price Index |
Tracks the path of inflation. |
|
Jan. 12
|
UK gross domestic product |
Measures a region’s economic activity. |
UK industrial production |
Indicates the economic health of the industrial sector. |
|
US Producer Price Index |
Measures the change in prices paid to producers of goods and services. |
Source: US Federal Reserve, as of Dec. 13, 2023
Source: Bloomberg, as of Dec. 29, 2023, as measured by the MSCI ACWI price index. The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets. Price indexes do not take into account dividends and cash payouts.
Source: Bloomberg, as of Dec. 29, 2023. European and US high yield bonds measured by the ICE Bank of America Euro High Yield Index and US High Yield Index. The ICE Bank of America Euro High Yield Index tracks the performance of euro-denominated, below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. The US High Yield Index tracks the performance of US-dollar-denominated, below investment grade corporate debt publicly issued in the US domestic market. Global bonds measured by the ICE All Maturity Global Broad Market Index, which tracks the performance of US-dollar-denominated, below investment grade corporate debt publicly issued in the US domestic market.
Source: Bloomberg, as of Dec. 29, 2023. Commodities measured by the S&P GSCI Index. The S&P GSCI Index is an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets. Gold spot prices based on Bloomberg aggregated data.
Source: Federal Reserve Bank of Dallas, Jan. 6, 2024
When doves yell: Fed loudly signals a September rate cut
Minutes from the July FOMC meeting were surprisingly dovish, and Federal Reserve Chair Jay Powell suggested a likely policy shift in comments from Jackson Hole.
Reversal of fortune
After the sharp decline bottomed on August 5, new data drove a strong US and global stock rally for one of the best weeks this year. We still believe the US will avoid a recession.
Why the recent market correction may have been an overreaction
Last week saw a big market sell-off that significantly reversed itself, suggesting the happiest investors may be those who ignored it all.
Important information
NA3313772
Header image: 10’000 Hours / Getty
Some references are US centric and may not apply to Canada.
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Should this contain any forward looking statements, understand they are not guarantees of future results. They involve risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from expectations.
Diversification does not guarantee a profit or eliminate the risk of loss.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.
Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries
The Federal Reserve’s “dot plot” is a chart that the central bank uses to illustrate its outlook for the path of interest rates.
UK gilts are bonds issued by the British government.
A basis point is one hundredth of a percentage point.
Disinflation, a slowing in the rate of price inflation, describes instances when the inflation rate has reduced marginally over the short term.
Fedspeak is a technique for managing investors' expectations by making deliberately unclear statements regarding monetary policy to prevent markets from anticipating, and thus partially negating, its effects.
Inflation is the rate at which the general price level for goods and services is increasing.
Hawkish is to favour relatively higher interest rates if they are needed to keep inflation in check.
Yield is the income return on an investment.
A high yield bond is a bond that is rated below investment grade at the time of purchase.
Tightening monetary policy includes actions by a central bank to curb inflation.
Risk assets are generally described as any financial security or instrument that carries risk and is likely to fluctuate in price.
The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets. Price indexes do not take into account dividends and cash payouts.
The ICE Bank of America Euro High Yield Index tracks the performance of euro-denominated, below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. ICE All Maturity Global Broad Market Index tracks tracks the performance of US-dollar-denominated, below investment grade corporate debt publicly issued in the US domestic market.
The S&P GSCI Index is an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets.
The opinions referenced above are those of the author as of Jan. 8, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes.
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