Market Summary – January 2024
With the economic data continuing to show resilience in the US economy, equity markets posted further gains in January, with the ASX 200 finishing up +1.1% and MSCI World ex Australia up +5.6%. Interestingly though, the drivers of this rally were quite distinct from Q4 2023. Then market optimism had been primarily focussed on the idea of the “goldilocks” scenario, the hope that rate rises would not be impactful enough to materially slow down economic growth but would still be sufficient to dampen inflation.
January however has seen Bond investors start to walk back some of the rate cuts factored into markets at the end of 2023. This is being driven by the inflation data led realisation that rates, particularly in the US, are likely to stay higher for longer. This has impacted bonds and rate sensitive sectors such as global REITs (-3.9%) and Infrastructure as well. Big tech remains the standout in terms of positive returns, as it has through much of 2023.
Domestically inflation looks to be softening a little quicker. While there remains a big divergence in spending habits and economic circumstances between younger and older Australians, in the aggregate the impact of higher rates is starting to present in the economic data. While the RBA isn’t ruling out another rate rise, its likely rates will fall sooner in Australia than overseas.
Looking ahead, we expect US and global rate cut expectations to continue to moderate, given sticky inflation components driven by US wage growth, and a risk averse Federal Reserve. Their job not being made any easier by government spending to alleviate cost of living pressures for lower income earners. This will likely continue to impact bonds and rate sensitive sectors, in our view. We remain relatively constructive on equities but continue to watch the data very closely for any sign of rates impacting economic demand. The start to 2024 has so far proven to be another challenging but rewarding period for financial markets.
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