MARKET INSIGHT – January 2024

MARKET INSIGHT

Prime Partners’ monthly analysis of global economic and financial market news.

Stock market rally rhymes with economic slowdown

Few investors would have risked being very optimistic at the start of the year if they had been aware of the various geopolitical and financial upheavals that would occur in 2023. However, with the end of the year just around the corner, we can safely say that it has been a very good vintage for the financial markets. Against all odds, optimism has prevailed this year, after having admittedly evaporated in 2022, and despite an economic slowdown that is now clearly visible.

For the occasion, we are opting for a slightly different format for this month’s issue. Financiers are only interested in the future, and although they often look to the past for clues, we will still not be able to predict the shape of things to come in 2024. What we can do, however, is highlight some of the key parameters that we believe will determine next year’s performance.

 « The greater the hope, the more brutal the disappointment » Franz Olivier Giesbert

We are, of course, talking about future monetary policy and the attitude that central bankers will adopt as the year progresses. The hopes of multiple future rate cuts that have become entrenched in the minds of market participants in 2023 leave no room for them not to materialize, or to be only partially realized, in 2024. Conversely, should there be many rate cuts, it would mean a sharper-than-expected economic slowdown that the central banks would seek to contain. We are expecting 3 to 4 rate cuts in the US over the course of the year, with the Fed’s language more data-dependent than ever.

 « Resilience is the art of navigating through torrents » Boris Cyrulnik

The US economy has proved particularly robust this year, and the American consumer has been able to count on a very favorable job market. We see US employment as a key variable for next year. The much-vaunted soft landing of the economy cannot be achieved against a backdrop of rising joblessness and falling consumer spending. We believe that the current economic slowdown will remain manageable and will not be accompanied by a sharp drop in US employment.

 « Uncertainty is the most difficult of all torments to bear » Alfred de Musset

Nearly half the world will go to the polls in 2024, but it is the US presidential election that will be decisive in many ways. A Biden-Trump duel seems to be taking shape, even if the latter’s candidacy is not entirely certain, and neither is the outcome of the second round of their possible confrontation. The face of geopolitics in 2024 could be greatly altered by the outcome of the American election. Developments in current conflicts, whether armed (Ukraine, Middle East) or dreaded (Taiwan), will be closely tied to the attitude of the future tenant of the White House. It is presumptuous to predict election results, and the complexity of the American voting system makes this task all the more hazardous. We will therefore refrain from taking any firm bets on the markets in relation to possible political changes.

 « One makes war when one wills, one ends it when one can » Niccolò Machiavelli

Beyond the US election factor mentioned above, it goes without saying that recent years have seen a marked deterioration in the international environment and the resurgence of very significant armed conflicts. It seems that diplomacy has become belligerent, and no one really knows how the confrontations the world is currently witnessing may evolve. Financial markets will continue to factor in the end of the “peace dividend” era, and the prices of certain assets such as gold and oil should reflect this. Current armed conflicts and their many repercussions will prevent us from becoming too complacent about geopolitics next year, even if a large number of developed countries continue to enjoy relatively good economic health.  

In view of these few major determining factors for the New Year, we think it wise to keep a cool head as we tackle 2024 in our allocations. Applying this year’s successful recipes seems justified to us, in what we would describe as a cautiously optimistic frame of mind.

The bond component of our portfolios should potentially generate a return not seen for many years, as soon as central bankers begin to lower interest rates. Holding cash will remain attractive, thanks to the returns offered by money market funds, particularly in dollars. Equities will probably continue to account for the bulk of our mandates’ performance, without necessarily playing up what has been least successful this year, or giving in to likely phases of euphoria or pessimism. Finally, as we have done for many years, we will continue to invest in liquid alternative strategies, whose performance in 2022 and 2023 has further validated our decision to devote part of our allocations to active long/short managers, both in equities and bonds.

We remain convinced of the vital importance of taking a long-term view of our investments, even more so in troubled times when volatility abruptly takes hold and puts a strain on investors’ nerves. Diversification, confidence in our convictions and the pursuit of performance driven by multiple contributors will remain at the heart of our considerations over the coming year.

There are few periods when financial markets are not a preoccupation for investors, but the holiday season is one of them. We wish you all the very best for a successful 2024.