After the V-shaped recovery of the pandemic and an unusual down year for both stocks and bonds in 2022, Wall Street was decidedly bearish going into 2023. Both policymakers and investors struggled to pinpoint the stage in the economic cycle given distortions driven by pandemic policy responses. Violent interest rate swings were the only certainty. In a highly eventful year, monetary policy meetings were the main events.

Market narratives ebbed and flowed in 2023 from hard to crash landing, and then from soft to no landing, back to hard landing again, only to close the year fully in the soft-landing camp. Market sentiment was in fact even more volatile than normal, from recession fears at the start, to resilient growth over the summer, apprehensions about ‘higher for longer’ interest rates in the fall, and finally culminating in elation over expectations for perfect economic conditions in the festive season. 

The strength in the labour market along with accumulated consumer savings ensured ample liquidity supporting continued consumer spending. These welcome surprises were instrumental for the economy’s outperformance in a high interest rate environment. The Magnificent Seven and overall resilient earnings drove equity performance, while enthusiasm over AI and weight-loss drugs provided an additional ballast. While equity markets excluding China delivered, sentiment remained cautious until favourable economic data in November led to an early ‘Santa rally’ and Powell launched a ‘pivot party’ in December as the FED signalled 75bps of rate cuts in 2024.

The ‘almost everything rally’ that transpired took performances in 2023 to 24.4 per cent for developed market equities (Q4: 11.5 per cent) and 5.7 per cent for global aggregate bonds (Q4: 8.1 per cent). Long-term investors that stayed the course are delighted with the robust recovery as traditional 60/40 portfolios delivered circa 15 per cent returns in 2023 (FY 2022: -16.9 per cent).

In 2023, markets delivered a stark reminder of how influential popular narratives can be in driving strong gains yet capable of delivering sharp turnarounds as crowded positions are exited. Markets have and always will, create their own reality leading to an ever-evolving market narrative and sentiment.

As for 2024, this might be a crucial transition year back to normal, setting the foundation for more sustainable economic growth and steadier market returns. Markets have indeed moved to reflect a more compelling macro backdrop pricing in double the cuts indicated by the FED dot plot. It is worth wondering whether the rally has got ahead of itself. Rate cuts have only been mapped out and Central Banks’ data-dependence mantra remains the ultimate get-out of jail free card. They may be in no rush to cut rates and risk a hard-won victory over inflation.

In addition to the ever-evolving monetary policy, ongoing conflicts in Ukraine, Gaza and the Red Sea, tensions between the US and China, mounting fiscal challenges and significant global elections make market predictions increasingly complex. In the meantime, circa 5 per cent annualised short-term rates are subtly encouraging investors to time the market.

In the near term, markets are experiencing some beneficial consolidation. The possibility of rate cuts, particularly in the EU, combined with cautious positioning, however, suggest a positive year. Should policymakers successfully stick the landing, then 2024 could have a mid-cycle feel to it, despite the economy potentially being in a later stage. Stable earnings and looser market conditions could pave the way for a continuation of the bond-led equity rally as both inflation break-evens and real yields drop. At the same time, there is nearly $6 trillion parked in money markets. This substantial capital could spur an ‘everything, everywhere rally’.

Long-term investors may take this opportunity to determine their liquidity needs and consider judiciously adding appropriate investments to build up resilient core portfolios as markets tend to be forward-looking and are unforgiving when it comes to timing. 

The coming year is expected to offer ample investment opportunities and dispersed returns, as economic pathways and monetary policies continue to diverge. Even more so as the business cycle stabilises and if the market broadening materialises. As demonstrated in 2023, divergent returns underscore the importance of portfolio diversification and reward for active management. Leveraging macro expertise via dynamic asset allocation can inspire alpha generation.

Alternatively, investors may capitalise on major global trends to achieve better outcomes within traditional static allocations. The economy is currently being shaped not only by normalisation but also key structural factors such as decreasing workforces, increasing geopolitical divisions, and the shift towards sustainability. While inflationary these significant trends represent investment opportunities in Tech, Energy, Defense, and Infrastructure now and in the future. Markets are quick to embrace such fundamental shifts as demonstrated by AI-related gains.

The author and the company have obtained the information contained in this article from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The author and the company make no guarantees, representations or warranties, and accept no responsibility or liability as to the accuracy or completeness of the information contained in this article.

The author and the company have no obligation to update, modify or amend the article or to otherwise notify readers thereof if any matter stated therein, or any opinion, projection, forecast, or estimate set for the herein changes or subsequently becomes inaccurate.

The value of investments may go down as well as up. If one invests in a product, they may potentially lose some or all of the money they invest.

BOV Asset Management Ltd is licensed to conduct investment services in Malta under the Investment Services Act by the Malta Financial Services Authority.

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