Global stock markets are on track for their strongest performance since 2019, riding a powerful two-month wave.
This surge stems from the widespread belief that major central banks have concluded their interest rate hikes and may even embark on cuts next year.
According to a Financial Times report, the Stoxx Europe 600 closed Friday, the final trading day of 2023, at its highest level in nearly two years, buoyed by a 0.3% gain. Across the Atlantic, futures pointed to a flat open for the S&P 500, just shy of its all-time high.
This bullish investor sentiment reflects an easing of anxiety around rising interest rates, which had previously dampened market enthusiasm.
belief that central banks are nearing the end of their tightening cycle, and could potentially loosen monetary policy in 2024, has fueled a sustained rally across major benchmarks.
The MSCI World Index
The MSCI World index, a broad gauge of global equities, has surged by 16% since late October and is up 22% this year, its best annual performance since a 25% gain in 2019.
The sizeable recent gains in stocks and bonds have been driven by a faster-than-expected decline in inflation in big economies, which has stoked a growing consensus that borrowing costs will fall in 2024.
The Federal Reserve added fuel to the rally at its meeting in mid-December when new projections from policymakers signaled that there would be rate cuts next year.
- “Once the Fed pivoted, it put investors into a positive frame of mind,” said Tim Murray, multi-asset strategist at T Rowe Price. “That was a big deal and it was unexpected.”
Inflation has dropped faster than anticipated on both sides of the Atlantic. US consumer prices rose 3.1% in the year to November, down from October’s figure of 3.2%, while UK inflation slowed sharply to 3.9%, far below expectations. Eurozone inflation dropped to 2.4 %, the slowest annual pace since July 2021.
Traders are now pricing in six rate cuts by both the Fed and the European Central Bank by the end of 2024, a stark turnaround from the fears of “higher for longer” borrowing costs that triggered a global bond sell-off in the autumn.
The Bloomberg Global Aggregate Index
The Bloomberg global aggregate index of government and corporate debt is up 6% this year, having been down about 4% in mid-October.
- The US 10-year Treasury yield, a benchmark for global financial assets, has fallen to 3.88% from more than 5% in October. Yields fall as prices rise.
- “Bond market investors have suffered whiplash this year,” said Sonja Laud, chief investment officer at Legal and General Investment Management. “Any data point can create a lot of volatility.”
- Some investors think stock markets are now pricing in too much optimism that inflation will continue to trend lower without the US economy slipping into recession.
- “I would anticipate that some of the frothiness around rate cuts will start to fade in the new year,” said Greg Peters, co-chief investment officer at PGIM Fixed Income.
