The US Federal Reserve made it official at its last meeting in 2023: interest rates are likely to be cut in 2024 thanks to lower inflationary pressure. The core rate of consumer spending (PCE, excluding food and energy) rose by just 0.1% in November compared to the previous month and by 3.2% year-on-year, which was below expectations. For the time being, the Fed feels that it has tamed inflation. The US central bank has thus signaled the first interest rate cuts of around 75 basis points by the end of 2024. The financial market expects a total of seven rate cuts by the beginning of 2025, with the key interest rate falling from the current 5.5% to 3.75%. Meanwhile, there are also voices that see the Fed's easing tactics as politically motivated in order to increase Joe Biden's chances of re-election and thus prevent a return of Donald Trump. This is also supported by positive seasonality in the pre-election years. The US dollar was correspondingly weak, while bonds, equities and precious metals were well supported. By contrast, the Bank of Japan found no arguments to raise its still negative key interest rates and left its monetary policy unchanged. The next few months are likely to be very interesting and the big question remains whether the interest rate hike cycle will not cause any major damage. In particular, whether the US economy can actually avoid a more severe recession, as is expected. Given the elevated valuations and ambitious earnings expectations, this question will be decisive for the 2024 investment year. With the recovery underway, investor sentiment remains very relaxed, which is typical of the classic year-end rally with thin trading volumes. As a result, the entire month of December was very quiet aside from the monetary policy surprises. Data on the labor market in the new year should shed light on the state of the economy and impetus will also come from the corporate world with the quarterly results from the second week of January. There has already been a rather negative foretaste of the upcoming reporting season from Nike, FedEx and Oracle, which missed expectations by a wide margin. Falling prices are not an immediate advantage for the retail sector, as prices can no longer be increased.
The looming interest rate cuts led to subsequent gains, although there are major differences depending on the reference currency (see FOCUS). 75% of the S&P 500's gains for 2023 were based on the ten largest stocks - an extreme value. Following the positive development, however, market breadth has increased again. Smaller stocks have also risen sharply again, with almost 70% of the stocks traded on the NYSE trading above their 200-day average at the end of the year (as much as in March 2023 before the regional banking crisis). The US equity market has thus been rising for around 9 weeks in a row. This heavily overbought situation is likely to usher in at least one consolidation at the start of the year. Historically, however, equity markets are still higher on average 12 months after such series of gains. If history repeats itself (or rhymes), the current series of gains may even be a good omen for 2024 as a whole. For this to happen, however, the US economy will have to achieve a "soft landing", which is not impossible, but has rarely been successful. From an election cycle perspective, election years are often rather turbulent in the first half of the year before the upward trend resumes. Nevertheless, it is important to pursue the chosen investment strategy over the long term, as things often turn out differently than the financial community expects. In view of the increased recession risks, the very euphoric sentiment and not very favorable valuations, we currently continue to recommend a more cautious positioning. Thanks to low volatility, downside risks can also be hedged cheaply.
After two consecutive negative years, the global bond market can breathe a sigh of relief after all. However, it was still unclear in October whether a third negative year could be averted. There is now a plus of over 6% for 2023. Following the brilliant strength of bonds, we have shortened the duration again somewhat. In Switzerland, 10-year Swiss Confederation bonds are now yielding just 0.6% p.a. - a rather meagre return for the maturity risk involved.
The gold price climbed by 2% close to its all-time high, which has so far only been exceeded temporarily. Central banks are currently the biggest buyers of gold. According to the World Gold Council (WGC), around 337 tons were purchased by central banks in the third quarter, which amounts to 800 tons for the year to date and marks a record for the same period. High demand is coming from China, where the price of gold traded at a record high premium of $121/ounce in the third quarter. The Peoples Bank of China holds the title of the largest buyer globally with purchases of 181 tons. Despite the strength, ETF investors have so far remained entirely on the sidelines, characterized by a sixth quarter of net outflows in physical ETFs. Silver lost almost 4%, while industrial metals were in demand (aluminum +9%, copper +3%, steel +5%). Energy such as oil and gas lost significantly. Commodities thus left a very mixed picture as a reflection of the state of the economy. The USD fell below 84 Swiss cents and the euro dropped to 93 Swiss cents against the Swiss franc. The strength of the franc is back in full force, which is not particularly surprising in a world in which all inhibitions on debt accumulation have fallen.
The exceptionally positive end to the year is based on perfect disinflation. The green light for this scenario has now been given by the US Federal Reserve with the signal for falling interest rates. However, the danger of a hard landing (recession) in the US economy has not been averted and this risk must continue to be taken into account in the portfolio context. A repeat from our last commentary: seasonal patterns tend to indicate caution for the coming year 2024, which is congruent with our economic view of the world. Even if the positive mood on the markets may persist in the short term, we remain cautious for the start of the year. There is a high probability that the economy will slide into recession in 2024 after the historic cycle of interest rate hikes. However, this is currently being ignored by the stock market.