Investors began 2023 in a pessimistic mood after the trials of 2022, but are ending on a festive high with stock markets enjoying a good old-fashioned year-end “Santa rally”.
The US stock market looks like finishing the year 25 per cent higher, driven by yet another tech stock frenzy, this time over the artificial intelligence (AI) revolution, which saw chip maker Nvidia rocket almost 250 per cent.
The “Magnificent Seven” mega-cap US tech titans (Apple, Microsoft, Google-owner Alphabet, Amazon, Nvidia, Facebook-owner Meta and Tesla) conquered the investment world all over again, but they weren't the only successes.
It was a good year for cash, as interest rates topped 5 per cent, as did bond yields, while gold smashed all-time highs in December.
Some warn the rally has gone too far and investors now risk starting next year by being too optimistic instead.
Equities
Despite the bright end to the year, investors were “largely bearish” for most of 2023, says Yves Bonzon, group chief investment officer at Julius Baer.
“This explains the magnitude of the November rally, when many were forced to change their minds. The phenomenon continued into December and was reinforced by the US Federal Reserve’s announcement that it is considering cutting interest rates in 2024,” he adds.
The US economy is on course to expand at 2.1 per cent in 2023 but that is forecast to slow to just 1.4 per cent in 2024, and Emma Wall, head of investment analysis and research at Hargreaves Lansdown, warns: “2024 is not going to be a year of rapid or sustained growth.”
Countries and corporates that loaded up on debt in the zero-rate era will struggle to meet today’s higher borrowing costs.
“Any economic wobble will hit tech and growth stocks hardest, and money will flow to lower risk assets,” Ms Wall says.
Today’s high US stock valuations make them less attractive, while “macroeconomic headwinds in Europe are just too tough to justify investing new money in the region this year”, she adds.
Ms Wall is more optimistic about Asia and emerging markets, where stocks “are trading at a significant discount compared to their developed market counterparts”.
“China is a beaten-up region we think is worth looking at, despite the negative headlines,” she suggests.
However, she is wary of Japan, despite lower interest rates, as the weak yen will act as a drag on performance for investors in other currencies.
Michael Strobaek, chief investment officer at Lombard Odier, says US stocks should remain a core portfolio holding, despite higher valuations and “risks from geopolitics, energy, strategic competition with China, and a high-stakes, highly-polarised US presidential election”.
Ole Hansen, head of commodity strategy at Saxo Bank, says the “green transformation, renewable energy and energy storage were the worst-performing themes” of the year but that could change.
“With funding costs coming down and ongoing efforts to combat climate change, these under-owned sectors could see a comeback in 2024,” he adds.
US dollar
The all-conquering US dollar has fallen 2.73 per cent against the euro, 4.73 per cent against sterling and 7.42 per cent against the Swiss franc this year.
Much of the damage was done in the final weeks of the year, as Fed rate cut hopes hit safe-haven flows and US government bond yields, deterring buyers.
Yet, Mr Strobaek reckons the greenback may recover.
“A US soft landing amid sluggish growth elsewhere should see the US dollar maintain both yield and growth advantages versus peers,” he adds.
Cash
Savers enjoyed a good 2023 as interest rates rose again and again. That’s their reward for enduring years of near-zero returns.
“It feels good to hold cash when rates are high and other markets are this volatile,” says Jacob Manoukian, US head of investment Strategy at JP Morgan Private Bank.
“Cash works best relative to stocks and bonds in periods when interest rates are rising quickly, and investors question the durability of corporate earnings growth,” he adds.
As interest rates fall, savings rates will inevitably follow, Mr Manoukian says.
“We think this is as good as it gets for cash.”
Christian Gattiker, head of research at Julius Baer, describes cash as “an attractive stepping stone” for people moving between asset classes, but cautions: “Only to be used as a tactical buffer, as short-term rates may be lower in 12 months.”
Bonds
After a disastrous 2022, when bond prices crashed with shares, 2023 was much better, and 2024 could be better still.
Bonds pay a fixed rate of interest and this looks less attractive when rates are climbing. When rates fall, the reverse happens.
Thanks to today’s high yields and low prices, bonds haven’t looked this attractive since before the global financial crisis, Mr Manoukian says.
"Bonds provide stability and income. Given the recent increase in yields, they are now well-positioned to deliver on both fronts,” he adds.
head of investment analysis and research, Hargreaves Lansdown
Gold
The gold price spiked to an all-time high of $2,198.54 an ounce on December 3 on interest rate cut hopes, before falling below $2,000.
The precious metal doesn’t pay interest and lower rates will make it more attractive as yields on rival safe havens cash and bonds retreat.
Despite the recent dip, gold is now on track for its best year since 2020, says Mr Hansen.
“We maintain a positive outlook in the firm belief that rates have peaked, and that Fed funds and real yields will start to trend lower.”
Gold is priced in dollars and will get cheaper relative to other currencies as the Fed cuts rates and the greenback fades, attracting buyers in key markets like China and India.
Mr Hansen says central banks will stock up on gold, which the World Gold Council estimates added 10 per cent to the price this year, and that should continue in 2024.
“We expect a bumpy ride towards a fresh record high,” Mr Hansen says.
Bitcoin
Bitcoin started 2023 at $16,000 and looks like ending the year at round $45,000, up almost threefold.
The number one crypto is back with all the hype that it entails, including excitable talk of the price hitting $100,000 in 2024. As ever, anything could happen.
Investors expect a boost from US regulatory approval of spot-Bitcoin exchange-traded funds (ETFs), and the next “halving” in April, which will further squeeze supply.
Alyse Killeen, managing partner of Stillmark Capital, says buy-and-hold investors are sitting on 70 per cent of total supply.
“This should support Bitcoin by reducing the supply available for purchase and trading,” she says.
Institutional adoption may also drive the price higher and its resurgence will bring in new buyers.
“We’ll see further adoption from people who don’t read the financial pages.”
Black swan risks
As ever, next year’s biggest shock will be the one investors don’t see coming.
Mr Gattiker lists some potential sources of disarray: “US politics, monetary policy errors, the return of systemic issues, a credit crunch, growth breakdown in China, geopolitics, blackouts, trade tensions and leverage.”
As 2023 has shown us, it’s not the pessimism that kills you. It’s the optimism. So don’t get your hopes too high.
