Happy 2024, everyone! We hope everyone had a great holiday season. We thought we’d start the year with a quick recap of how markets did over the last year (pretty good!), two years (not as good!), and this year (too soon for doom and gloom).
2023 turned out to be a great year for markets
A broad range of assets saw positive returns last year, as shown in Deutsche Bank’s chart below (dark blue bars).
Up to October 27 (light blue bars), returns were more middling, however, with about half of the assets shown still in the red.
Since then, though, markets rallied in part on increased optimism that cooling inflation and easing labor market tightness would allow the Fed to cut rates sooner and faster than previously thought.
By the end of the year, the Nasdaq Composite was up 45% (leftmost bar), the S&P 500 rose 26%, and even US Treasuries gained 4% (something that seemed impossible when 10-year rates hit 5%).
Looking at 2-year returns isn’t as strong
Expanding the scope to the last two years is a different story, however. That’s because that captures the selloff driven by the Fed (and other central banks) pivoting to rate hikes in 2022 (chart below by Deutsche Bank).
The major US equity indices are more or less flat since the end of 2021 – the S&P 500 is +3%, The Nasdaq Composite is down 2% – and Treasuries are down 9%.
Other assets are even worse off, like:
- European bonds (EU investment-grade corporates, and government bonds for the EU, Italy (BTPs), German (Bunds), and UK (Gilts)), where the economic recovery has been weaker and the European Central Bank and Bank of England hiked rates much more than expected two years ago
- Commodities(CRB, Copper), with global manufacturing activity in recession much of the last two years
- EM equities (MSCI EM Equities, Hong Kong’s Hang Seng, China’s Shanghai Composite), which tend to be more sensitive to manufacturing and commodity cycles, along with China’s housing-related slowdown
Rally stalls in 2024, but no need to fear “January Barometer”
Turning to 2024, the US rally since the fall has stalled.
10-year Treasury yields climbed back to 4% from a low of 3.8% (chart below, black line) and the Nasdaq 100 is down 3% (blue line) this year.
Some have worried this is a bad sign for 2024 returns based on the “January Barometer,” which suggests full-year returns are worse when January is negative, but our research shows this effect isn’t the death sentence many think.
Investors have at least 4 reasons to reassess 2023’s optimism
There are a few reasons the rally has stalled:
- First, it simply seems like markets realized they overdid it a bit, pricing 6 rate cuts compared to the Fed’s 3.
- New geopolitical tensions, with attacks on ships in the Red Sea disrupting shipping routes, pushing shipping costs up 30%-175% and oil prices up 5+% (both inflationary), and increasing uncertainty.
- This week’s Fed minutes call for rates to stay elevated “for some time,” in contrast to the rate cut optimism caused by Chair Powell’s press conference last month.
- Stronger-than-expected labor market data, with the ADP jobs report adding 164k jobs against expectations of 130k, and today’s jobs report showing bigger-than-expected gains of 216k jobs (vs 170k expected) and the unemployment rate staying unchanged at 3.7%.
You can see it in the March rate cut expectations in the chart below. They’ve fallen from 90% late last month to 66% now (chart below), and full-year rate cuts have been trimmed to 140bps from 160bps.
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