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How Should We Invest in Equities

U.S. economic indicators continue to trend positively. As we had noted in our previous issue, the decline in inflation, driven by falling oil prices, has put more money in the hands of consumers, sparking a notable increase in spending. The U.S. Economic Surprise Index has seen a rebound in recent weeks, dispelling earlier concerns about a recession. A key highlight was Thursday’s Q4 GDP report, which significantly exceeded forecasts with an annualized quarterly growth of 3.3%, surpassing the consensus estimate of 2.0%. While this growth rate was partly inflated by inventory accumulation, the underlying figures remain robust nonetheless. 

Steady But Not Stable

A world of no surprises cannot last forever and we had said so last week. Indeed, this past week, several economic data points in the US marched into positive territory, suggesting better momentum than many economists had expected. The Citigroup economic surprise index bounced off zero to its best level in around a month. It is encouraging that the index is no longer neutral!

Nothing Has Changed But Everything Has Changed

The transition from 2023 to 2024 has been characterised by a stark contrast: While investors appeared in high spirits and fully confident at the close of 2023, 2024 so far has seen them take a more cautious and subdued outlook of the future. This was evident last week as equities declined 1-4% while yields on longer-dated bonds surged 10-15bps. This shift, despite no significant changes in market fundamentals, suggests a growing acknowledgement on the part of investors that the market rally in the last quarter of 2023 was perhaps excessive.

Ten Pointers to 2024

As we step into a new year, it's crucial to understand the evolving landscape of financial markets. We look back to draw lessons and try to gauge what can be set right. We dwell on the happenings of the year gone by and try to understand what can go right – and wrong – for the markets. This commentary presents ten pointers on how the markets fared and where we think we are headed.

Doves in the Ascendency

The doves at the Federal Reserve were in the driver’s seat last week as the central bank's statement and dots boosted hopes for significant policy rate cuts in 2024. The Fed is signalling three rate cuts next year; the market is pricing around six. Although the Fed has not entirely ruled out the possibility of raising rates again, the market is clearly of the view that rates have peaked and that there may be a good reason to cut rates earlier than the central bank indicates. Meanwhile, policymakers now appear more sanguine about the inflation outlook as the sharp drop in oil prices has helped tame inflation somewhat.

A World of Contrasts

After a few weeks of disappointment, US economic data changed trajectory for the better, challenging the market view that US growth was rolling over and the Fed should resort to interest rate cuts sooner. Both the US employment numbers and the US consumer confidence survey came in better than expected. The Fed’s monetary committee meets this week. While the market is not expecting any fireworks, it will likely be hoping for a messaging that at least helps keep the current rally intact. Nevertheless, we struggle to see how the Fed could endorse such a move higher in bonds and equities when the medium-term strength of economic data is unclear.