Markets in a Nutshell — For December 2023

Christmas came early for investors after US Federal Reserve chair Jay Powell gifted the markets a ‘dovish hold’. It was the biggest hint yet that the Fed could start to ease the squeeze by cutting interest rates early this year. US markets reacted by throwing a pivot party, with equity prices soaring and bond yields lurching lower. The euphoria was contagious, with the MSCI All Country World Index — which tracks shares in 23 developed and 24 emerging markets — jumping 4.8% in December.

Global bond markets also surged, while interest-rate-sensitive precious metals also gained on the prospects of lower rates in 2024. Industrial commodities traded higher on expectations of a soft landing, but crude oil was sharply lower on cracks in the OPEC cartel and higher US production, despite Middle Eastern tensions.

The Foord global funds added meaningful absolute returns in December. The managers of the conservative Foord International Fund removed the fund’s US hedges as the market’s momentum became assured — with the fund gaining 4% for the month to cap an otherwise disappointing performance year.

In the event, global stock markets rose 22% in US dollars in 2023 to record their best year since 2019. The US S&P 500 Index rallied 24% to close just shy of its all-time high. Yet the contrast between the market returns and the global economic backdrop is stark — considering that the world economy was burdened with historically high inflation and aggressively tighter monetary policy in many regions, wars in Europe and the Middle East, the Chinese property crisis, and a deepening US/China rivalry straining geopolitics and supply chains.

While America’s stock market rally was impressive, it was also lopsided. The ‘Magnificent Seven’ cohort of big tech shares — which now account for 30% of the S&P 500 Index, and which together rose 111% on an equal-weighted basis — contributed around 60% of the total index return last year. Looking at the universe more broadly, about 70% of stocks underperformed the index, with roughly a third falling in 2023. Nonetheless, more benchmark-oriented managers would have benefited from this narrowly driven market.

Looking ahead to 2024, key financial assets are now pricing in interest rate cuts of a magnitude that are rare outside of recessions — and possibly dangerous if we don’t get one. The year ahead is littered with potential economic, political and geopolitical landmines: two wars are still waging, while about 40% of the world’s population will be subject to elections in 2024, including the US — a potential flashpoint if Donald Trump secures the Republican nomination. All the while tensions between the West and the Rest fester.

Even looking narrowly at the Fed’s own forecasts in comparison to markets, there is room for retracement. Where officials now predict they’ll make three quarter-point cuts over the next 12 months, the US market — still giddy on too much pivot punch — is pricing in as many as six cuts for 2024. Putting all this together, the backdrop for global markets in 2024 is anything but stable.

The markets themselves are contradictory. Equities are pricing in a healthy earnings environment for corporate America, but the inverted US yield curve is pointing to recession. Gold — traditionally a ‘risk-off’ safe haven — saw its price soar during 2023 at the same time as ‘risk-on’ growth stocks neared historic highs.

While the US economy has thus far been more resilient than we expected, the market’s exuberance reminds us eerily of the ‘everything rally’ of 2021: Buying sparked by euphoria rather than sober-minded pragmatism, stories and themes that captured investors’ imaginations, and a rising tide that saw even Bitcoin gain more than 150%. Behind it all there is a gnawing unease that returns have been driven mostly by rerating rather than reality.

The net result is that the US share market may be even more vulnerable to a downturn than it was before. Firstly, because it is now unexpected. And secondly, because valuations have moved even higher — providing a less attractive base as a starting point. We expect seesawing market prices to endure as investors nervously watch individual data points.

It is disappointing that the Foord global funds did not participate fully in 2023’s outsized returns due to our low allocation to US tech, our hedges against falling US equities, and our allocation to other regions instead. However, we are comfortable that our focus on risk management remains appropriate. The managers are likely to reinstate the hedges in due course.

In Singapore, we usher in Chinese New Year next month — welcoming the Year of the Dragon. It is a year that traditionally represents growth, progress and prosperity. With the risk premium of Chinese stocks now at levels that historically pre-empted spectacular returns, the odds are stacked well in favour of the dragon living up to expectations.