Global Asset Allocation Team Market Update – January 2024
Financial markets ended 2023 on a high note, with the prospect for a soft economic landing and a dovish monetary policy pivot sparking a profound rally across both stock and bond markets. Notably, the Federal Reserve provided its strongest signal yet that it has ended its tightening campaign and pointed towards a pivot towards easing in 2024. Moreover, data showing the Federal Reserve’s preferred inflation metrics barely rose in November endorsed the growing narrative that central bankers have successfully broken the back of inflation and will aggressively ease monetary policy this year. For 2023 as a whole, public markets churned out one of their best performances in 25 years, with a majority of the gains occurring in the last few months of the year after the market narrative shifted towards optimism about the likelihood of a soft landing.
Global stock markets generated some solid results in December on the back of the sharp retreat in bond yields that propped up valuations and fueled an impressive year-end rally across the globe. The MSCI All Country World jumped 4.7%, with all major benchmarks we track posting exceptional results. The S&P 500 advanced 4.4%, while the S&P/TSX rose 3.6%. Elsewhere, the MSCI EAFE jumped 5.2%, while the MSCI gauge of emerging market stocks rose 3.7%.
Fixed income markets also had a stellar end to 2023. Bond yields tumbled lower as some tentative signs of cooling inflation and a dovish-leaning message from the Federal Reserve prompted investors to brace for a flurry of rate cuts in 2024 . In the US, bond traders have doubled-down on wagers for aggressive rate cuts this year. The market is now pricing-in more than 150 basis points of rate cuts for 2024, with traders increasingly betting that the first rate cut will arrive by March. That’s more than twice as many rate cuts that were penciled in by Federal Reserve officials in the December forecasts. These dovish-leaning dynamics spilled-over globally, with traders also bracing for significant easing from the Bank of Canada, the European Central Bank, and the Bank of England, with between five to six rate cuts fully discounted by the end of 2024 across all three countries. For the month, the Barclays US Aggregate Bond Index rose 3.8%, while the FTSE Canada Bond Universe gained 3.4%.
The US dollar (DXY) stumbled to its weakest since July amid mounting speculation the Federal Reserve will start to unwind its restrictive monetary policy stance in the first half of 2024. Currencies around the world jumped to multi-month highs against a broadly weaker greenback, with the euro (+1.4%), pound (+0.9%), yen (+5.1%), and Canadian dollar (+2.4%) all strengthening at the end of the year.
Finally, crude oil capped what was a tumultuous year and retreated in December. Signs of swelling supplies in the United States and lingering concerns about ebbing demand growth combined to drive prices lower – and counteracted the bullish impulse stemming from an erratic geopolitical backdrop and repeated production cuts from OPEC and its allies. By contrast, gold advanced to a record high alongside the latest decline in treasury yields, buttressing the allure of the non-interest-bearing metal.