Global Market Overview – January 2024
The January effect, which dictates sentiment for the year based on how well (or badly) financial markets do in that month, is set to fill superstitious investors mostly with optimism.
Markets have enthusiastically responded to economic developments over the month. The US, for instance, reported stronger-than-expected GDP growth, confounding those who have been expecting a recession for a year. At the same time, major central banks like the Federal Reserve and the Bank of England have signalled the end of the rate rise cycle as inflation continues its downward trend.
But in the meantime, China has surprised on the downside. The country that not so long ago was seen as easily on the path to becoming the world’s largest economy has been lagging behind the US, burdened by an economy struggling with deflation.
Add in the high market valuations following 2023, then there are a couple of reasons that too much of an optimistic stance might be dangerous. In fact, there are still doubts about whether the US will achieve a soft landing, and the UK and Europe are still flirting with recession.
All told, there was little surprise to take note of in January – signs are increasingly pointing towards Donald Trump winning a US re-election (now the firm favourite at the bookies), in a year where half of the global population will have elections; in the equity markets, the usual suspects (aka technology stocks) continued to drive the S&P 500’s upwards trend. The December rally flowed into January, pushing the US benchmark index to an all-time high. It was only at the very end of the month that investors had a brief reality check – with the Federal Reserve making it clear that rate cuts weren’t as close as many had hoped; certainly unlikely before Easter.
On the other side of the Atlantic, recent purchasing managers index (PMI) data indicates the UK and Europe travelling in opposite directions. Despite increasing pressures from disruption to the supply chain stemming from the Red Sea, the UK has seen further manufacturing growth in January; the eurozone has continued to grapple with a contracting manufacturing sector.
Much as we might like it to be, the January effect is not a reliable predictor of the year (right about half the time). So, how this year will unfold for the financial markets is anyone’s guess.
Core Views
Over the next twelve months, we think that the global economy will slow down - prompting bouts of volatility. In this environment, it is important to rely on a stable identity. Economic uncertainty creates fear and investor sentiment tends to overreact to economic turning points. Going forward, we believe that:
• Inflation is coming down: Across the developed world, inflation has peaked, and is mostly falling. Supply-chain disruptions have eased, energy prices are a little more settled, and companies are no longer reporting issues with finding workers. Of course, slower inflation still means rising prices –so the cost of living pain isn’t going away quickly.
• Interest rates are high: We’re now over a year into the rate hiking cycle. Interest rates are unambiguously high when compared with the past decade. The impact of higher rates is always the same – although time-to-effect changes in every cycle.
• The economy is slowing: For consumers and companies, day-to-day life is getting harder – whether it’s rising costs or increased debt, there’s less money left at the end of the week or month. As the flow of money around the economy slows, strong growth is more difficult to achieve. The world may or may not slip into a ‘technical’ recession in the next three months, but a sluggish growth environment is already here.
Source: 7IM
Summary
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
January 2024
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited