Summary
As we began 2023, expectations for the U.S. economy were much gloomier than what has actually evolved in the first 11 months of the year. Stocks are on pace to close out 2023 on a strong note, as several major US market indexes recently set new highs for the year. However, the big story during November was the decline in Treasury yields. The bond market experienced large moves in interest rates, with the 10-year Treasury yield falling to 4.36% from over 5% in October. As a result, investors are optimistic as the U.S. economy continues to exceed expectations.
The Story
After experiencing three consecutive months of decline in August, September, and October, the market sharply rebounded in November by 8.9 percentage points. This marked the best monthly performance of 2023, not only erasing the losses from August to October but also reaching the highest closing price of the year on the first trading day of December. Last year, most analysts expected the world to be in a recession, but this has proven not to be the case. Investors are hopeful for the prospect of a Goldilocks scenario, envisioning a situation where inflation is tamed without triggering a recession. This is described in the investment world as a soft landing. This optimism follows recent data, which indicated a slight increase in the unemployment rate, sluggish job expansion, and wages returning to pre-Covid levels. A soft landing has only been achieved once in the last sixty years, but that does not mean it cannot happen again. The Federal Reserve is walking a narrow tightrope, but at present, it looks like they are navigating to the other side without causing significant economic disruption.
Looking Ahead
As we move towards 2024 and what is likely to be a year of politics, we are hopeful the markets will continue this current rally. Interestingly, since 1951, when looking at US presidential election years, there have only been three negative stock market years, with the rest being positive. Investors are hopeful that with inflation coming down and the upcoming election, 2024 should be a good year for stock markets albeit it a more active and selective trading cycle.
We still like selective growth stocks where there remains true innovation and potential for change, especially recent trends in consumer behaviour that were accelerated by the pandemic but prefer value equities on the whole. Value equities continue to offer more protection against downside threats compared with their growth peers, as they tend to benefit most from strong recoveries after recession and trade on lower earnings multiples. In times of global stress, the US also tends to act as a safe haven investment, which props up markets.
Considering the above, we believe that we have been in an extended period of U.S. equity out performance, and we now expect the trend to continue a bit longer albeit it with some volatility in small and mid-cap companies. The continued upwards trend in US equities is the narrowest in history, with just a select few large tech companies carrying the entire index higher. We do not expect this to continue in perpetuity.
