While central banks remained prudent, pointing toward a limited number of discount rate cuts later in the year, investors decided to bet on a much larger and faster reduction in interest rates. If that came to pass, it would, of course, lead to a stronger economic performance for the real economy and enhance corporate profits. That bet led to a strong performance in both bond and stock markets.
However, 2024 has thus far brought some bad news. As the price of oil stabilised, its effect on reducing inflation has been dampened. Through much of 2023, energy prices were being compared to the spikes of 2022. That means that energy price inflation was negative, bringing inflation closer to levels acceptable to monetary authorities. However, we’re not here yet, and with energy no longer playing the role it had in the recent past, inflation has been ticking up both in Europe and the USA.
It also means that central banks must remain prudent and have less incentive to cut interest rates, which implies credit will remain expensive for extended periods. Investors are having to adapt to that new reality.
Bond markets have experienced a difficult month, falling as interest rates increased. Markets experiencing high inflation levels and struggling to reduce them have been particularly impacted.
While the performance of bond markets has been almost uniformly disappointing, stock markets have had a far more mixed performance. In the USA, the AI mania is still going strong and has continued to support tech sector stocks and the Magnificent 7 in particular, pushing Nasdaq, Dow and S&P500 to all-time highs.
Tokyo did even better. Companies that used to sit on huge piles of cash doing nothing with it while offering meagre compensation to investors have come under increased scrutiny. Under pressure from local watchdogs, corporate governance has evolved, and the return for investors is expected to rise in the form of dividends, buybacks, etc.
Elsewhere, EMU stocks have changed little over the past month. That doesn’t surprise us if we consider that all activity indicators point to a continued slowdown on the continent and poor performance in 2024.
All in all, and more than ever, be selective and diversify your investments.