January Market Commentary

Commentary by Cube Capital Ltd  – A Thornbridge Appointed Representative

Market Commentary

Global stocks had their best start to a year for four years as the Nasdaq had its best start in over 20 years. Hopes the Fed (Federal Reserve) will ease the pace of monetary tightening boosted stocks, along with a more upbeat Davos conference than many had anticipated, and continued weakness in energy prices. Many of the trends that dominated the past year reversed in January as market sentiment improved from the uncertain end to the year. The continuing indications around the globe that inflationary pressures were easing and that energy prices, particularly gas prices falling further added to the hope that the Federal Reserve would turn more dovish in the coming months. Bonds and the Technology sector led the rally, the consumer discretionary sector outperformed staples, another sign speculators had become more optimistic. The price of gold rallied as the dollar weakened, and commodity prices, aside from energy, also had a good start to the year. Nearly all major financial assets outperformed their post Global Financial Crisis average returns in January.

Outlook

The anticipated path of US interest rates will influence investor sentiment in the coming months. After four consecutive 75 basis point rises in 2022, as the FOMC (Federal Open Markets Committee) engaged in one of the most aggressive tightening cycles in recent history, the last meeting of the year saw the Fed slow the pace to 50 basis points as indications that inflationary pressures were easing, taking the Fed funds rate to 4.5%. Further signs that the inflationary pressures were weakening had led the market to expect a further slowdown to 25 basis points at the first meeting of 2023, and the FOMC duly obliged. As important as the decision itself is the accompanying statement. The Fed has to weigh up the balance between inflation expectations falling, but still above their 2% target. The continuing strength of the labour market, which argued for maintaining their hawkish stance, against indications that the outlook for the US economy looks mixed at best. Jerome Powell did tread a slightly more dovish path, reverting to the data-dependent stance, whilst also preparing the market for further rate rises in the coming months. The members of the Fed may have also been encouraged to slow the pace of rises this month as longer-term inflation expectations remain anchored around 2%.

Despite the recent optimism helping boost stock markets, one has to remain wary of the uncertain outlook. The fourth quarter earnings season has been mixed at best as many blue chip companies highlight weak consumer demand and a softer outlook. The Federal Reserve slowing pace of rate rises partly reflects concerns about economic growth as well as the improving outlook for inflation. Historically, during economic uncertainty, the Fed would be looking to loosen monetary policy and not tighten it. The Bank of England and the ECB (European Central Bank) followed on from the FOMC, raising rates by 50 basis points. As strikes, and as the IMF (International Monetary Fund) report highlighted this week, our tight fiscal policy is currently hampering economic activity in the UK, growth in the UK is now forecast to shrink in 2023. It will be interesting to see if this influences the Chancellor in the March budget to rein in some of his proposed increases.

Author: Alex Hackett

Alex is a member of the investment funds team. She is involved in the portfolio construction process, regulatory reporting, trade surveillance and monitoring.