Market update – Period ending 29 February 2024

The last quarter of 2023 began in a similar way to how the previous quarter ended, with some ups and downs in the stock markets. However, the markets quickly bounced back and started to rise again, reaching levels close to their highest points in 2023. Both equities and bonds saw strong returns after a poor start in October, with November providing the strongest set of monthly returns in over three years.

US markets received a leg-up as investors reacted with fervour at the prospect of rate cuts in 2024. With market commentators pronouncing the rate hiking cycle to be at its end and rhetoric from the US Federal Reserve (Fed) striking a dovish tone, markets jumped at the first sign of a let-up in rates. Of particular note were the S&P 500 and NASDAQ, which were up 11.7% and 13.8%, respectively. As we have seen more than once in this cycle, Wall Street has been much more eager in its expectation for rate cuts, pricing in sharper and more prompt rate cuts than communicated by Fed officials.

This expectation of imminent rate cuts also fed through into global bond markets, with yields falling across the curve in response. The Bloomberg Global Aggregate Bond Index (100% hedged to NZD) returned 5.7% over the quarter.

US economic data softened through the quarter, with annual Consumer Price Index (CPI) slowing from 3.7% to 3.2% in October and to 3.1% in November. Economic growth for Q3 was revised down to an annualised 4.9% from 5.2%. Job growth also slowed in the US as unemployment hit 3.7%, while non-farm payrolls were up approximately 180k in November and 150k in October, both short of the 2023 average.

The same story played out in other territories, with weakening economic data and strong investment returns coming amidst a dovish monetary policy backdrop. The Eurozone and the UK largely followed the US, as the expectation that there would be no further rate hikes spurred equity returns. Eurozone CPI fell through the quarter, with November’s data coming in at 2.4% year-on-year. In the UK, CPI dropped to 3.9% year-on-year, much lower than the previously predicted 4.4%. Moderating economic data gave credence to the argument for rate cuts to begin in 2024, though both central banks remained coy.

Global equities have experienced a strong start to 2024, with resilient economic data and relatively strong earnings reports helping the S&P 500 surpass the 5000 mark for the first time. Within equities, developed markets have outperformed emerging markets. The UK and Eurozone have both underperformed international developed market equities, while the Japanese Nikkei 225 index reached a new all-time high for the first time in over 30 years. US equities continue to go from strength to strength as the artificial intelligence narrative and economic strength in the US offset the anticipation of a slower projected path of rate cuts. Closer to home, New Zealand equities have lagged international counterparts after disappointing earnings and interest rate uncertainty weighed on market sentiment. The MSCI World is up 9.6% for the calendar year-to-date.

In fixed income, government bonds have been negative as developed market yields have generally increased across the curve. Within credit, high yield has outperformed investment grade debt and credit spreads for both remain near 52-week lows. The Bloomberg Global Aggregate Index (NZD Hedged) has returned -0.9% in the calendar year-to-date, while the Bloomberg Global Aggregate Corporate Index (Hedged NZD) has returned -1.6%.