Equity markets closed off 2023 delivering strong gains in the final months of the year.

The S&P 500 rallied for 9 consecutive weeks, posting a return of +16% in the November to end-of-December period with a 20.59% 12-month return. The ISEQ performed well with a 12-month return of 13.93% of which circa 12% was achieved from the 15th of October to the 31st of December. European equities rallied +17%, just ahead of the US.

What drove this incredible end-of-year market surge? There were a number of factors at play. We had a -12% correction in crude oil prices from $80/barrel to $70/barrel. The USD also weakened versus the Euro (-5.5%) and the Japanese yen (-6.5%). The catalyst behind the reversal of fortune was the shift in Fed policy from interest rate increases to cuts for 2024. While markets wrongly priced in such a pivot several times over the past year and a half, by year-end, inflation pressures had turned strongly enough toward disinflation to make it a reality.

For 2024, the biggest influence on financial market returns will be the shift from tightening policy to easing by major central banks in the US and around the world. Can Jerome Powell deliver a soft landing while navigating the biggest inflation surge in decades? So far, he has done a commendable job. 2024 will be a bumpy ride for equity investors. However, a positive market in equities should continue throughout the year, in our view, despite increased volatility.

Analysts believe inflation should continue to moderate. This may cause central banks to believe real rates are too restrictive, allowing them to reduce short-term rates before inflation targets are reached. In the US, the Bond markets have already priced in six 25 basis points interest rate cuts this year and in Europe 4.

As Jerome Powell pivots from hawk to dove, the US yield curve should steepen (lower short-term rates and flat to rising long-term rates) and the US dollar should decline versus other major currencies. Analysts expect real GDP growth to moderate, but a severe global recession is a low probability.