Pictet North America Advisors SA
Market Thoughts — A year to remember
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Investors, often prone to extrapolating recent circumstances into their forecasts, found themselves navigating uncharted waters as macro-economic realities defiantly diverged from consensus expectations. The gloomy outlook that lingered into the first half of the year sharply contrasts with the startling returns achieved across virtually all asset classes by year-end.
Contrary to expectations, the U.S. economy exhibited remarkable resilience. The job market remained firm and corporate earnings held up far better than anticipated.
Nevertheless, the ominous outlook at the beginning of the year was grounded in substantive reasons. The economic landscape bore the scars of 2022, with inflation exceeding 6% and the Federal Reserve persistently hiking interest rates. As a result, funding costs escalated, and financial conditions became tight, auguring that the U.S. economy was on the brink of a significant slowdown, if not an outright recession. The anticipated repercussions were widespread and profound. Consumers were projected to tighten their belts as pandemic-era savings diminished, while aggressive cost-saving measures by corporations, including layoffs, were foreseen in the face of mounting earnings pressures. The anticipated stringent economic realities and the forceful monetary policy responses by central banks would cast a foreboding shadow over financial markets. The glum prediction befell in March with the collapse of Silicon Valley Bank, triggering concerns of contagion across U.S. regional banks. Simultaneously, on the other side of the Atlantic, Credit Suisse faced intense pressure, culminating in a last-ditch purchase by UBS. However, by June, policymakers' targeted and decisive interventions effectively restored calm to financial markets.
Contrary to expectations, the U.S. economy exhibited remarkable resilience. The jobmarket remained firm and corporate earnings held up far better than anticipated. As a result, equity markets rallied propelled by the excitement surrounding Artificial Intelligence (AI), with notable milestones such as the integration of Chat GPT capturingthe imagination of investors and enthusiasts alike. Moreover, a shift in the Federal Reserve’s policy (a pause) and guidance (the “dot plots”) played a pivotal role in reshaping the investment landscape. Investors’ confidence in a “soft landing” for the U.S. economy and an “immaculate disinflation” towards the 2% inflation target provided a tailwind that boosted asset prices higher into the year-end.Subsequently, risk assets bounced back from the lows to deliver strong performances across asset classes and regions in 2023. Equity markets registered decisive wins with the MSCI World index (24.4%), S&P 500 (+26.3%), Euro Stoxx 600 (+16.6%) or Swiss Broad Market Index, SPI (+ 6.1%) scoring big. Likewise, the bond markets delivered positive returns for the year with the US Treasuries (+4.1%), US Investment Grade Bond Index (+8.5%) and US High Yield Bond Index (+13.5%). Remarkably, Gold (+13.1%) outshined the rest of the commodity complex which struggled in 2023. The US Dollar lost ground against other major currencies as evidenced by the retreat of the DXY index (-2.1%).
2023 returns of the “Magnificent 71” versus the S&P 500 Index
Source: Bloomberg LP
Market outlook
Looking ahead to 2024, we bid farewell to a year that defied expectations and will serve as a poignant reminder. Investing requires not only an understanding of the macroeconomic backdrop but also a keen awareness of market price action. As we move into the new year, we observe that the consensus is settled on a "soft landing" for the U.S. economy, accompanied by a double-digit earnings-per-share growth for the S&P500 and more than 100 basis points of rate cuts by the Federal Reserve. The lessons learned from the twists and turns of 2023 compel us to be skeptical of such resolutely optimistic prospect. It now appears that most of positive news is already priced in or incorporated into asset prices. Furthermore, geopolitical tensions and economic fragmentation add layers of complexity, possibly increasing market volatility as the U.S. presidential election approaches. Thus, while acknowledging that the U.S. economy is likely to avoid severe recession, we think it’s sensible adapt a thoughtfully constructive stance.
In conclusion, legitimate reasons for caution notwithstanding, we reaffirm our core message from our previous January flash note: over the course of time, staying invested in financial markets remains the safest option for investors. To enhance the prospects of success, we shall continue to seize attractive total return opportunities in global markets with focus on quality and long-term.
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Pictet North America Advisors S.A, route des Acacias 48, 1211 Geneva 73, Switzerland, is a Swiss entity registered as an Investment Adviser with the Security and Exchange Commissionin the USA and as a financial intermediary under the Anti-Money Laundering Act, supervised by AOOS, a Self-Regulatory Organization (SRO), Clausiusstrasse 50, 8006 Zurich, Switzerland, recognized by the Swiss Financial Market Supervisory Authority (FINMA).
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