November – January 2024

The S&P 500 rose +15.54% from 4,194 to 4,846, reaching an all-time high of 4,928 at close on 30th January. Similarly, the Nikkei 225 gained +17.59%, rising from 30,859 to 36,287 and hitting multiple all-time highs in the process, with the high for the period coming on 22nd January at 36,547. In Europe, the S&P Euro Plus also had a good three months, rising +13.60% from 2,126 to 2,416 – and in the UK, the mid-cap dominated FTSE 250 enjoyed numerous tailwinds to finish up +13.32%. However, the FTSE 100 was a relative underperformer after it posted gains of +4.22%, rising from 7,322 to 7,631.

These strong returns came after a difficult October, which saw political uncertainty in the US give way towards the end of the month after a new Speaker of the House (Mike Johnson) was elected by peers, in a move which helped shore up confidence in equity and fixed income markets. Multiple positive inflation prints further buoyed this confidence – with October’s figure (released in November) in the UK coming in at 4.6% against expectations of 4.8%, and November’s figure came in at 3.9% against expectations of 4.4%. This last figure coincided with the FTSE 250 rising +1.62% on the back of the news and 5-year interest rate swaps (used as the basis by mortgage providers to underwrite fixed-term mortgages) falling on the day. It was a slightly more muted story in the US, with their two releases coming in at 3.2% (vs 3.3% expected) and 3.1% (as expected), with both figures helping to reinforce the perception that the inflation fight is now mostly over. Although the January releases revealed that the UK and US inflation prints exceeded expectations by 0.2% (4% and 3.4%, respectively), the lack of any sustained negative market response is again a solid further indicator of investor confidence.

This view has been mirrored by the major Western central banks – with the Bank of England, US Federal Reserve, and European Central Bank all officially pausing their interest rate hiking (at 5.25%, 5.5%, and 4.5%, respectively). Rhetoric from policymakers has softened in recent months, with the most pronounced shift coming from Fed Chair Jerome Powell, who signalled that rate cuts were on the horizon for 2024. Minutes for their December meeting, released in January, also spoke of the ‘diminished upside risks to inflation’, with fears now turning to the ‘downside risks to the economy’ from elevated interest rates. However, this stance does stand in contrast to remarks made by Bank of England Chair Andrew Bailey, who asserted that it was premature to consider rate cuts and that definitively identifying the peak in rates was not yet possible.

Another feature of the period has been the stark contrast between US and European GDP figures. In 2023, the US economy grew 2.5% – with expectations at the start of the year being of low to minimal growth. It is worth noting that the World Bank also predicted that global growth would be 1.7% at the start of 2023 – though the final figure is likely to be around 2.6% due in large part to the resilience and strength of the US economy. The eurozone, however, grew a paltry 0.1%, as a weak Chinese economy was a drag on exports, and the war in Ukraine caused fiscal budgets to be reformed as the year went on. After a decade of impressive economic growth in the run-up to the COVID-19 pandemic, Germany is also now quickly becoming a laggard as dampened industrial and manufacturing output combined with weak demand both home and abroad contributed to a -0.3% fall in GDP for 2023. In the UK, negative growth figures of -0.1% in 2023 Q3 and -0.3% in 2023 Q4 means the UK is now suffering a recession. For 2023 overall, however, albeit by just 0.1%, the UK economy did grow.

Importantly, despite the recent positive footing that markets have trodden, it should be remembered that the global geopolitical landscape remains precarious despite recent market optimism. Ongoing wars, such as the war in Ukraine and the Hamas/Israel conflict, persist, with upside implications for inflation due to potential disruptions to global trade in key locations like the Red Sea. Indeed, Iranian-backed Houthi rebels in Yemen have targeted commercial vessels in recent months, prompting military responses from the US and UK, as well as the rerouting of shipping, increasing costs. However, perhaps of greatest concern to market observers remains the threat of a Chinese invasion of Taiwan. The recent Taiwanese election saw the pro-Western DPP maintain power at the expense of the China-backed KMT, averting immediate escalation. Any provocation that might prompt China to invade Taiwan could have disastrous consequences for investment markets. Thus, the preservation of the status quo in Taiwan’s recent election is seen as a marginal victory for Western interests amidst ongoing geopolitical tensions.