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The Week In Markets – 6th January – 12th January 2024

This year’s political merry-go-round has already begun in France as we saw ex-Prime Minister Elisabeth Borne resign after meeting with President Macron. She has been succeeded by 34-year-old educational minister, Gabriel Attal. Macron was instrumental in the move, aiming to sway voters five months before the country’s parliament election.

Mr Attal was a firm favourite for the role as he’s been described as a “baby Macron” with comparisons made in terms of ambition and strong media presence. He has stood firm on tough decisions during his time as educational minister and Macron certainly trusts him to reunite his party that has become fractured after unpopular pension changes and more recently, strict immigration laws.

In the UK, the pinch of higher interest rates continues to hurt households as 39% more households in December 23 were unable to pay their energy bills. Energy bills initially jumped in February 2022 when Russia invaded Ukraine, and consumers became constrained by 14 consecutive interest rate hikes taking interest rates to 5.25%. Over the 2022 winter period into 2023 spring the UK government subsidised energy bills, however this has since been scrapped taking its toll on more households. We’ve previously written on the falls seen in oil and gas prices, but this has not yet fed through to regulated household energy tariffs. More pleasing for the UK was the release of GDP data on Friday morning which showed the UK economy grew 0.3% on a monthly basis, higher than anticipated.

We’ve seen markets accelerate through the last couple of months in 2023 and portfolios have enjoyed the “Santa Rally”, but this year has so far been more subdued. US inflation data, released on Thursday had potential to re-ignite asset markets. However, there was a mixed reaction in markets as headline inflation came in at 3.4% (year-on-year), a rise from the November figure of 3.1% and market expectations of 3.2%. Core inflation fell to 3.9% which wasn’t quite the drop expected as markets forecasted 3.8% but was a slight drop from the previous figure of 4%. Shelter (rents) continues to be the key driving force behind the high inflation data. However, there is still the very real prospect for rental inflation to soften over the coming months, which will help bring inflation closer to target, and would likely be well received by markets.

Weekly jobless claims, also out on Thursday, came in lower than market expectations at 202,000. March is the month investors have placed their bets for central banks to begin rate cuts, however the data points are proving there is no sign of weakening in the labour market at the start of this year.

In the UK we narrowly avoided weeklong tube strikes this week however this has not been the case in Germany. Europe ‘s largest economy is battling travel disruption on many fronts as not only did train drivers call a three-day nationwide strike, but farmers have lined hundreds of tractors outside Berlin’s Brandenburg Gate in a bid to pressurise the government into scraping plans to cut farmer subsidies. Strikes are one of a growing list of problems for Chancellor Olaf Scholz’s government that is already facing a declining economy and the headwind of high interest rates.

While much of the developed world continues to tackle elevated inflation, China is continuing to struggle with persistent deflationary pressures. Data released this week showed prices fell (deflation) by -0.3% over the year. The producer price index (PPI) which measures factory gate prices dropped by -2.7%, a 15th consecutive decline, highlighting that downward pressures on prices are unlikely to dissipate in the near term.

A bright spot this week has been the Japanese stock market. Tokyo core CPI data showed inflation at 2.1%, falling from the previous month and highlighting inflation is well under control in Japan. This coupled with low interest rates and low equity valuations helped spur the Japanese equity market higher. The Nikkei 225 (Japan index) is trading at levels not seen since February 1990 and has already rallied 7% in January alone.

Markets continue to wrestle with views on inflation and interest rates. After a couple of months of very soft data, Thursday’s US inflation print has made investors question whether falling inflation is still such a sure bet. The trend certainly appears to be lower for inflation, but whether we will see six interest rate cuts in the US this year remains to be seen. As always we will be active in our exposure and stay diversified in our approach.

Nathan Amaning, Investment Analyst.

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

2024 Outlook

The first Investment Strategy Quarterly of the year discusses 10 themes for 2024, plus a look at bonds, energy security, and market performance in a presidential election year. Read all this and more in Investment Strategy Quarterly: 2024 Outlook.

The Month In Markets – December 2023

The Month In Markets - December 2023

Markets resembled a see-saw for much of 2023, rising up one month, only to fall back down the following month. However, after strong moves upwards in November, markets did not see-saw down to earth, but extended gains to finish the year off strongly.

Stock market gains in December are often referred to as the “Santa Rally”. Investors had clearly been well behaved this year and avoided being on the naughty list; they were rewarded with handsome returns across equity and bond markets this December.

The rally in markets appears to have been driven by continuing conviction in the view that inflation is fast approaching target in developed markets and soon central banks will be able to cut interest rates which should help support the consumer and corporates alike. The key has been the change in expectation – over the summer months, bond and equity markets were pricing in a much more challenging environment; one of high interest rates and stubborn inflation. A combination of economic data and central bank rhetoric has helped changed the narrative recently.

Markets were supported by pleasing inflation data from developed markets during December (data covers November). Here in the UK, inflation came in at 3.9%, much lower than expected. The UK has closed the gap in recent months with its peers, after being a clear outlier with elevated inflation. Across the pond, US headline inflation was 3.1%, while Eurozone inflation was 2.4%, only marginally above the 2% target. Within the Eurozone, countries such as Italy are now flirting with deflation. This data will make it challenging for the European Central Bank to persist with holding interest rates in restrictive territory as we head into 2024.

Alongside inflation data, the US Federal Reserve, Bank of England (BoE) and European Central Bank (ECB) all met to set interest rate policy with all three central banks continuing to hold rates at current levels. Accompanying the meetings were press conferences, with US Fed Chair Jerome Powell appearing particularly dovish, mentioning the prospect of the first interest rate cut. His contemporaries, Andrew Bailey (BoE) and Christine Lagarde (ECB), attempted to deliver a much firmer message that their fight with inflation was not yet over, and the prospect of rate cuts was premature, however, the market did not take note and continued to believe the data would dictate rates cuts in the first half of 2024.

The labour market continued to paint a rosy picture, with unemployment remaining low across developed markets while wage growth is now outpacing inflation in most major markets.

This cocktail of data helped provide markets with the sense of a dramatically improving picture for 2024; low probability of recession, falling inflation and falling interest rates. It was enough for asset prices to continue their march up from November, with almost all assets advancing, a complete reversal of 2022 when assets all fell together.

UK fixed income assets, including government bonds and corporate bonds performed exceptionally well in December. This was driven by falling interest rate expectations, with the more interest rate sensitive (typically longer-maturity) bonds seeing the biggest gains. Global bond markets in general continued to make handsome gains following positive moves in November. The major global bond index had its best two-month period since 1990.

Most major equity markets made gains during the month, with small and mid-cap stocks generally leading markets higher. Within the UK, the large cap equity index delivered circa 4%, while the more domestically focused mid-cap index advanced over 9%. Small and mid-cap equities are viewed as more interest rate sensitive; these stocks struggled in 2022 and for much of 2023, but the big shift in inflation and rate expectations led to large gains towards the end of the year. The same was true in the US, with the Russell 2000 (US small cap index) following up a strong November with a stellar December, making it one of the best two-month periods on record.

It’s interesting to note that most of the equity gains were driven by a ‘re-rating’, that is stocks becoming more expensive, as opposed to expectations of higher profits and earnings in 2024. We still see continued value in many equity markets, with the potential to re-rate further, but are also mindful of pockets of the equity market which are now looking expensive.

The rally in Q4 was broad-based with equities and bonds advancing together. While much of 2023 was bumpy, by year-end most asset markets were at year-to-date highs. The same was true for our portfolios, which rallied strongly towards the end of 2023. While cash rates have been at their highest levels for many years, our portfolios still managed to outperform a typical one-year fixed rate deposit. History has repeatedly shown that over the long-term cash as an investment lag both bonds and equities and we continue to believe this will be the case going forward.

We would like to thank everyone for their support in 2023 and wish you all a Happy New Year!

Andy Triggs

Head of Investments, Raymond James, Barbican

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Appendix

5-year performance chart

The Week in Markets – 2nd January – 5th January 2024

Happy New Year and welcome to the first weekly note of the year. The current high interest rate environment looks to have led to people trading down as discount grocery stores Aldi and Lidl ran up their best ever trading day on Friday 22nd December. It is estimated that half a million shoppers switched permanently from the mainstream Tesco and Sainsbury to the discount stores. Tesco are set to release reports on how they fared over the Christmas period.

It is difficult to sit at the start of the year and forecast what is going to happen. However, that doesn’t stop us from making predictions and planning for a variety of different outcomes. Will inflation remain sticky or fall to the 2% target? Will central banks cut rates more than expected? Will we see the long and variable lags of monetary policy? Will we avoid a recession? Will potential elections influence markets? All valid questions that only time will answer.

On Thursday afternoon, labour leader, Sir Kier Starmer gave his first speech of the year. In his speech “Project Hope” he set out five main missions which include getting Britain building houses again, to decarbonise UK energy by 2030 and getting the NHS back on its feet.  Election years can have significant impact on investor sentiment so it will be important to stay on top of the political landscape this year.

Halifax bank reported UK house prices (year-on-year) rose for the first time in eight months as prices were 1.7% higher than the previous December. This has been due to a tight sellers’ market with not as many houses up for sale. In this higher interest rate environment mortgage rates have surged, and activity has fallen. However, as we have seen the pause in interest rates and investors flirting with the idea rates will be cut soon, buyers and sellers have begun to return to the market. The feeling is that as more people come to market, house prices could fall within the 2% to 4% mark and with mortgage rates continuing to drop, buyer confidence should increase, seeing more movement in the housing market.

US job openings was the first insight of the year into the labour market, with openings falling to 8.79m in November. This will be encouraging for the US Federal Reserve as a sign that the labour market is cooling and strengthen investor expectations of rate cuts later this year. Another positive sign for the US Fed is that the number of people quitting their jobs fell to 3.47m, the lowest level since February 2021. With less people quitting and job-hopping this should help ease wage growth.

We then received mixed market messages this afternoon as December US Non-Farm Payrolls data was released and surprised as 216,000 jobs were added to the economy. This came in largely above market expectations of 170,000. The strength of the number of jobs added to the economy should keep pressure on wages and bonds yields rose on the back of the data as investors mulled over whether an expected six interest rate cuts in 2024 was too optimistic.

The Eurozone may be in bigger trouble than first anticipated as business activity contracted in December. Purchasing Managers Index (PMI) is an index that indicates the direction a sector is heading (whether contractionary or expansionary), and the services PMI is currently still in the contractionary zone at 48.8. This could point towards a recessionary period as growth struggles continue; Q4 2023 GDP data could be negative as it was in Q3 2023.

Eurozone inflation as predicted by ECB President, Christine Lagarde, rebounded to 2.9% (year-on-year) in December. It was anticipated that the rise would occur due to the change in the energy price base, but core inflation (excluding food and energy) dropped to 3.4% in December from 3.6% the previous month. This strengthens the ECB’s decision to continue to hold rates firm.

The Santa Rally certainly delivered in the closing month of 2023, however, the first week of 2024 has been subdued. The tech-heavy NASDAQ 100 has just seen five back-to-back days closing down. The last time this event occurred was in December 2022, and following this the NASDAQ 100 went on to post stellar gains in 2023. We continue to stand by our beliefs on diversification within portfolios, allowing us not to be caught out by short term volatility. After such a strong end to the year, it is natural that there is an element of profit taking and rotation of out last year’s winners. We continue to see great value in many areas of the equity and fixed income markets and believe the backdrop of declining inflation, mild growth and an end to high interest rates should be supportive for asset markets.

Nathan Amaning, Investment Analyst.

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Raymond James, Barbican Newsletter

After an indecisive election campaign, the Prime Minister, despite his previous role as Chancellor of the Exchequer, was surprised to realise that the Conservatives just didn’t have the numbers to form a majority government.  In an unexpected turn of events, no other party was able to either, and so Labour were only able to form a minority government. Ramsey Macdonald’s 1924 government, supported by Asquith’s Liberals, only lasted nine months.

So much has happened in 2023 so, as we head into 2024 – an election year, both here in the UK and, of course, the USA – now may be a good time to ensure we plan for every eventuality. While each person will have individual needs and this newsletter is not meant in any way as advice, it would be useful to give consideration to the following areas to ensure they are not forgotten.

Lifetime allowance

In a surprising announcement by Jeremy Hunt, in order to encourage doctors to continue working, in his 2023 budget scrapped the lifetime allowance. Scrapping the limit on how much pension one can build up tax efficiently (currently £1,073,100 and originally meant to rise in line with inflation), potentially means greater planning flexibility not just for doctors but everyone addressing their future retirement. The simultaneous increase in annual allowance from £40,000 per annum to £60,000 has also enabled many to fund more into pensions than they were able to previously. As pension funding sometimes involves using allowances from previous tax years, this is an area to ensure you allow enough time to consider before the tax year end. 

Flexible ISAs

Not all ISAs are the same. While everyone is probably aware that they can fund £20,000 into their ISAs, one of the areas we are still surprised by is how many individuals have not got flexible ISAs. A flexible ISA will allow you to withdraw monies from your ISA during a tax year and, provided it is replaced in the ISA within the same tax year, the allowance is protected. Shouldn’t all ISAs be flexible? We would be happy to check if any that we do not look after on your behalf offer this important facility.

Also, if you haven’t funded your ISA this tax year, please do get in touch.  This is a ‘use it or lose it’ allowance and so don’t leave it too late.

State pension entitlement 

Entitlement to the full State pension is now based on a contribution record of 35 years of qualifying NI payments. If you had a career break or worked abroad you may find that you do not have enough for the full state pension. You are able to buy extra years to close this gap and at present you can go back as far as 2006 to top-up your entitlement in some of those years. However, this is changing from 2025 (from when you will only be able to go back six years) meaning this could be an important time to review your entitlement. 

The first step is to check your current entitlement:  https://www.gov.uk/check-state-pension

Only top up if you will get more pension. Speak to us if you need any help.

Welcoming new members and wishing adieu to one

It is now four months since we moved into our new office at 90 Basinghall Street. We are already at home here and the coffee machine and water fountain are working hard to keep both clients and staff properly caffeinated and hydrated. It has been wonderful too to welcome new members to the team:

James Hawkes is a welcome new addition to our Investment Committee. He worked with many of the team until 2015 when he joined Coutts, where he is now a Senior Multi-Asset Portfolio Manager. His expertise within asset allocation, portfolio construction and fixed income investing makes him a great fit for our Investment Committee.

We also have a number of new staff on the team:

Judith Parr, Aneeka Patel, and Nader Razak are Financial Planners and bring a wealth of experience to their roles with Raymond James Barbican. With the joining of Khaya Nyathi, our support team have found a wonderful new signing and the fact that he plays football so well is also a boon for our five-a-side team.

Talking of good news, it is lovely to also welcome our newest, in every way, member to the team. Huge congratulations to Harry Robinson and all his family on the arrival of their new baby daughter and sister. We look forward to seeing them in the office soon.

One final thing to share, which is both good and a little sad. Nick Lowy has now retired and we will miss his sunny optimism in the office. We wish him and Alison a wonderful retirement and look forward to seeing them at the summer party and investment lunches.

As always, please do get in touch if there is anything we can help with and do let us know if there are others who you feel we could help. Irrespective of who is in Downing Street, we know that when it comes to our clients, they can count on us to make a difference.

 

With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

The Week In Markets – 16th December – 21st December 2023

There are just four days to Christmas Day, but celebrations have begun early as markets have continued to soar. Falling inflation within the Eurozone and UK has continued to spur markets on.

UK inflation was released on Wednesday, falling to 2-year lows. Headline inflation for November (year-on-year) fell to 3.9%, down from 4.6% the previous month. Core inflation (excludes food and energy prices) fell to 5.1%, beating expectations of 5.6% and October’s previous 5.7%. This strengthens the case for interest rate cuts by the Bank of England (BoE) next year and investors have begun to price rate cuts by the beginning of Q2 2024. UK government bonds, which have been unloved for much of the year, have performed very well over the last six weeks, and this week was no different. The yield on the 10-year UK government bond fell to 3.5%, after reaching 4.7% only weeks ago, as investors reacted to lower inflation and the expectation of rate cuts in early 2024.

Eurozone inflation for November was released on Tuesday, showing inflation is now only just above the 2% target. 2.4% was the final figure (year-on-year) which was in line with market expectations and a fall from the previous month’s 2.9%. European Central Bank (ECB) President, Christine Lagarde, has warned against investors celebrating too soon and pushed back on early interest rate cuts. However, the market has so far dismissed her comments, believing the ECB will be forced to cut rates early in 2024. The yield on the 10-year German Bund dropped below 2% this week.

Assessing Eurozone inflation at a country level, it is tough not to be optimistic with regards to inflation. Year-on-year inflation dropped in 21 of the EU’s member states and remained the same in three more. In the case of Italy, headline inflation (year-on-year) has dropped off a cliff since September, falling from 5.3% to 0.6% in November, again largely driven by energy. It appears that for certain nations, deflation could soon be more of a risk than elevated inflation.

US home sales have risen in November by 0.8% (month-on-month), breaking five consecutive monthly falls. The popular US 30-year fixed rate mortgage rose to a 23 year high of 7.8% in late October but has since dropped off to 6.6% as US treasury yields have fallen. The market expectation that interest rates will be cut in 2024 has also fuelled the housing market, however two thirds of home owners are currently locked into mortgages under 4%. This will mean mortgage rates will have to continue to fall before we see significant shifts in the housing market. US equities have continued to advance this week and bond yields fall, with the US 10-year yield now falling through 4%. The market is now pricing in six interest rate cuts in 2024.  

In the US, two of Hollywood’s big five studios, Warner Bros and Paramount, have held discussions for a possible merger. The main motivation behind the deal is to combine the streaming services, Paramount Plus and Max (formerly HBO) in order to better rival Netflix and Disney Plus, who are dominating the streaming space. Netflix has recently cracked down on account password sharing, leading to more account openings and are up to 247.2m subscribers. The combination of Paramount Plus and Max subscribers would still be under 160m.

The strong moves in December have been pleasing to see, helping push portfolios to their highest levels in 2023. With plenty of cash still on the sidelines, M&A activity picking up and interest rate cuts potentially around the corner there is reason to believe this rally can continue into 2024.

This will be our last weekly round-up of 2023 and we would like to thank everyone for their support over the year.

 

Nathan Amaning, Investment Analyst.

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 9th December -15th December 2023

It looks like the Santa Rally well and truly arrived this week, with big moves upwards in both equities and bonds. The key driver seems to be the belief that central banks have now come to the end of the rate hiking cycle and will “pivot” very shortly, beginning interest rates cuts in 2024. There has been a big shift in market narrative from the summer months when “higher-for-longer” was the clear message.

It was a busy week for central banks, however, before they met we did receive US inflation data on Tuesday, which came in at 3.1% (year-on-year), in line with expectations. This was a slight drop from the previous month’s figure of 3.2%. The data cemented the US Fed’s decision to hold interest rates. While this was expected, it was Fed Chair Powell’s statement that led to asset markets bouncing. It’s clear that the US Fed are now willing to cut rates in 2024, even if the economy is not in a recession, with the US Fed currently expecting to cut interest rates three times next year. The market went further than this, and after hearing the speech from Powell, quickly priced in six rate cuts in 2024. The expectation of lower rates, which will support both consumers and corporates sent the Russell 2000 (US small cap index) up over 3% on Wednesday, with a similar return on Thursday. The index is now at a 52-week high, having been at its 52-week low only 48 days ago! Nearly all equity markets joined the party, with the tech-heavy NASDAQ index reaching all-time highs, and the S&P 500 fast approaching its all-time high, which occurred on 2nd January 2022. Lower rates acted as support for bond markets; the US 10-year government bond yield dropped below 4% this week, having hit a 16 year high of 5% only weeks ago. In such a risk-on environment, coupled with lower interest rate expectations, we have seen the USD weaken against a basket of currencies, including Sterling, which is approaching 1.28.

Both the Bank of England (BoE) and European Central Bank (ECB) followed suit and held rates steady. However, there was a difference in commentary with both Andrew Bailey (BoE) and Christine Lagarde (ECB) stating they are yet to consider interest rate cuts. It appears the market isn’t convinced of this and are pricing in cuts starting next year. Weaker than expected UK GDP data on Monday highlighted that the lagged effects of higher rates are beginning to bite and supports the view that the BoE will be forced to cut rates to support the economy as we look into 2024. Much like the US, we saw bonds rally, with the UK 10-year government bond yield dropping as low as 3.7% this week. Equities advanced, with the more domestic focussed UK mid-cap index benefitting the most, rising over 3% on Thursday. In general, small and mid-cap equities are seen as more interest rate sensitive and therefore stand to benefit the most from lower rates going forward. While positioning here has been painful at times, it’s pleasing to see the recovery over the last six weeks.

It wasn’t just bonds and equities that performed well this week, we saw gold rebound after a lacklustre start to the week. The prospect of inflation with lower rates (falling real yields), coupled with a weaker dollar boosted the precious metal, with the price per ounce moving back above $2,000. Commodities such as copper also performed well on the back of a weaker dollar and the expectation of more supportive policy from developed market central banks.

Purchasing Managers’ Index (PMI) from Europe and the UK, released this morning, highlighted that most countries were seeing contraction in manufacturing and services sectors, once again pointing towards a slowing global economy. This will do little to dampen the views that interest rates will need to drop next year to help ease the strain on economies and support economic growth.

After months of oscillating markets, there has been a shift since the start of November, with the consensus now firmly pointing towards a peak in interest rates, with cuts just round the corner. In terms of inflation, the narrative is that the battle is largely won, the white flag has been waived, and we will approach the 2% target in 2024/2025. Indeed, Eurozone inflation is already at 2.4%, a whisker away from target. The positive correlation we have seen between bonds and equities has now worked in investors favour (as opposed to 2022), with both asset classes rising together. Within portfolios it’s been pleasing to see a broadening out of equity market participation with some of the small and mid-cap funds performing well. While it hasn’t always felt comfortable to be invested in 2023, portfolios are now at their highest levels for the calendar year.

Andy Triggs, Head of Investment & Nathan Amaning, Investment Analyst.

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 2nd December – 8th December 2023

As we delve deeper into December, it’s always interesting to learn facts about Christmas spending. Over the Christmas period, Brits eat approximately 175 million mince pies. The UK also uses over 220,000 miles of wrapping paper per year. Despite the cost-of-living crisis, spending is expected to rise to a total of £27.6bn fuelled by credit cards transactions.

In the UK, Nationwide house price data showed prices have surprisingly risen for the third month in a row. House prices in the UK surged over the Covid period as the pandemic led to more households looking for greater living space and moving homes. This was also fuelled by government tax incentives and (at the time) low interest rates. Fast forward to today and with mortgage rates considerably higher than two years ago, affordability has become tougher. 

In the US, Spotify, the music streaming company, have announced further cuts to the workforce. They plan to lay off around 1,500 employees, this follows cuts of 600 employees in January and 200 in June. CEO Daniel Elk, admitted to over hiring over the past three years with the firm now expecting an operating loss over Q4. Spotify have big ambitions to reach one billion users by 2030 and part of the strategy included hefty podcast contracts for A-List celebrities such as Michelle Obama, Megan Markle and Prince Harry. Two major podcasts – “Heavyweight” and “Stolen” have already been told their contracts would not be renewed. Spotify users can almost certainly expect a price hike for streaming services!

November US Non-Farm Payrolls data was released this afternoon with 199,000 jobs added to the economy, coming in above market expectation of 180,000. This is a jump up from October’s figure of 150,000 and goes against the previous trend of a slowdown in hiring. The US labour market strength continues to surprise.

As we mentioned in the monthly note for November, consensus for developed markets have clearly shifted and this is becoming more evident as we saw the S&P 500 index close at a 12-month high level on 1st December, just shy of 4600. This is under 5% away from the all-time peak set in December 2021 and has been driven by the expectation we have seen the peak in rates, with potential cuts next year. We saw the US 10YR treasury hit 5% in October and since then the yield has dropped to 4.17%.

Euro zone inflation has followed the trend and tumbled down to 2.4% following ten straight interest rate hikes from the European Central Bank (ECB). This week ECB board member, Isabel Schnabel, gave a dovish speech, stating further interest rate hikes should be off the table. Just a month ago she had a different tune, with the view that one last hike was an option to tackle the last part of the inflation fight, but she has since switched her stance following the greater than expected drop in inflation figures. Bond yields have fallen reflecting this view as the Germany 10YR Bund fell to 2.16%, the lowest level in 6 months.

As we round up the weekly, it’s important to point out Gold reached an all-time high of $2,137, driven by a weakening dollar. Next week looks to be a busy week as US inflation and UK GDP data prints will be followed by the US Fed and Bank of England’s last policy meetings of the year. We continue to consider a wide range of asset classes to reduce portfolio volatility and capture investment opportunities. Diversification in asset class, style and management is key in order to navigate the markets.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Month In Markets – November 2023

The Month In Markets - November 2023

Just as night follows day, it turns out that in 2023 a good month in markets follows on from a bad month! While asset markets struggled in October, we saw a widespread rebound in November.

In aggregate, it was a strong month for equities and bonds. The apparent catalyst for the rally was a drop-in interest rate expectations across most major economies. In 2022, both bonds and equities struggled as markets were caught out by inflation and the subsequent interest rate rises required to tackle inflation. It makes sense, therefore, that a fall in inflation along with the expectation of deeper interest rate cuts in 2024 would lead to a recovery in bond and equity markets.

At the very start of November, the US Fed and Bank of England (BoE) had their latest monetary policy meetings. At both meetings, interest rates were held at current levels, with central bankers resisting taking interest rates any higher at this juncture. This was the second meeting in succession that both the Fed and BoE had held interest rates steady and was enough for the market to believe that we may now have reached peak interest rates for this cycle. The prospect of the end of rate rises gave markets a much-needed boost after a difficult October.

There was a second boost to markets in mid-November when inflation data suggested the Fed and BoE had been correct in rejecting the chance to take interest rates higher. Inflation data from the US and UK showed promising signs as it continued to fall closer to the 2% target. While there is a way to go, the improvement from 12 months ago is stark. Headline inflation for the US came in below expectations at 3.2%. Shelter (rent) is the largest component of the US inflation basket, and this is still driving US inflation, however forward-looking data indicates this should begin to fall in 2024 and should help the US Fed get inflation closer to the 2% target. Here in the UK, we saw headline inflation fall to 4.6%, from the previous month of 6.7%. This was the biggest drop since 1992, which was, in part, driven by lower price caps on energy coming into play on the 1st October. The fall in inflation was much needed for Prime Minister Sunak, who vowed to halve inflation by the end of 2023, a target he now looks like achieving. The impact of lower inflation on asset prices was dramatic. Small and mid-cap equities, which are often seen as more interest rate sensitive, rallied significantly. The UK mid-cap index rallied over 6% during November, outperforming the large-cap index by more than 4%.

Labour markets continue to prove resilient with the most recent US jobs data showing a further 150,000 jobs were created. While the speed of growth is declining, we are yet to see any major cracks in the labour market. If people are staying employed, they will likely continue to spend and keep the economy going – remember consumption typically accounts for around 2/3 of GDP in most developed markets. While employment levels remain low, we are now witnessing real wage growth for employees, where the average wage is increasing above the level of inflation. Here in the UK wages grew on average by 7.7% (inflation 4.6%) and in the US wages grew by 5.2% (inflation 3.2%). Positive real wage growth should be a boost to consumption. For much of 2022 and parts of 2023 inflation was outstripping wage growth, contributing to the cost-of-living crisis, hopefully, we are now at a sustained inflection point.

There were differing outcomes for gold and oil during the month. By month end gold was knocking on the door of all-time highs (in USD). The same cannot be said for oil, where the price of a barrel has fallen from $95 in October to $75 in November. This is despite elevated geo-political tensions in the Middle East. It appears concerns around demand going forward, as economies are expected to slow in 2024, are weighing on the price. Inventory data highlighted higher than expected levels of oil inventory in the US, pointing towards weaker demand. Lower oil prices, while bad for oil producers, should act as an effective tax cut on most consumers and corporates and be a net positive to the overall economy, while further easing inflationary pressures. 

The Autumn Statement ‘for growth’ was a bit of a non-event for markets, with no major policy changes at this stage. There were some positives for workers, with cuts to National Insurance, and at the margin, this should support consumption. On the day markets were fairly benign.

After months of back and forth between inflation and interest rates, November felt like a big month where the consensus very clearly shifted to developed markets now being at peak rates, and confidence that the battle against inflation has largely been won. This shift and easing of financial conditions were enough to lead to a rally across most asset classes. It was once again a timely reminder about the dangers of being out of the markets, with equities delivering in one month what one might currently expect from cash over one year. With many investors still sat on the sidelines, there is a wall of money which could re-position into risk assets should sentiment pick up. While this would be a short-term boost, we are drawn to the potential for long-term returns from equities with low valuations and bonds with high all-in yields.

Andy Triggs

Head of Investments, Raymond James, Barbican

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Appendix

5-year performance chart

Foundations for the future

In the last Monthly Market Commentary of the year, Raymond James’ European Strategist, Jeremy Batstone-Carr, looks back over November and discusses a shift in investor sentiment, contrasting economic performances, fiscal policy decisions in the UK and Europe, and more.

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