Newsletter
Rob Hayward
January 2024
Economic conditions
The increased global economic confidence has boosted US and overseas equity markets in 2023. However, rising inflation, lower economic growth and the expectation that US interest rates will rise in 2024 have damped performance of US and emerging economy stocks towards year end. The continued economic recovery of China and the an easing of political tension in Latin America have improved world economic sentiment.
The US central bank has made it clear that it will raise rates to contain inflation. US firms have been reporting lower profit margins as a fall back in final demand has combined with rising costs. Analysts await earnings reports from the first quarter of 2024 to provide guidance for future profits.
The world economy has been dragged along by the US but now threatens to overtake. As the US economy slows, the rest of the world is accelerating. A shift in focus or weighting from the US to the rest of the world would also reflect relative valuations.
Projections
| Indicator | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|
| World growth | 4.5 | 3.8 | 3.8 | 4.0 |
| US GDP | 4.0 | 2.5 | 2.0 | 2.5 |
| US Inflation | 3.0 | 3.5 | 3.0 | 2.0 |
| US Unemployment | 4.0 | 4.0 | 4.0 | 4.0 |
| US bond yield | 2.0 | 2.2 | 2.5 | 2.5 |
Trade tensions have increased. The trade talks between the US and China have been dragging on with little evidence of progress. Key decisions or agreements have been pushed into the future. There are worries that each side will start to apply the trade tariffs that they have long threatened. The US Presidential election in November has the scope to unsettle the international outlook but will not likely remove US-Chinese trade concerns. Democrat and Republican candidates are running equal in the latest Presidential opinion polls.
Upcoming events
Asset classes
- US Stocks (SPY) have reversed some of the strong gains seen at the beginning of 2023 as lower growth and lower earnings are forecast for 2024. Equities of emerging economies (EEM) are also weaker after a stronger start to 2024, with the prospect of higher US interest rates also a drag.
- US government bonds (TLT) have recovered from the weakness seen at the start of the year. There is confidence that the Federal Reserve will be able to slow the pace of economic activity without excessive monetary tightening. The spread to higher yielding corporate bonds (JNK) has narrowed and then widened as strong growth and a low level of defaults have been replaced by concerns about future corporate health with reduction in economic activity and higher official rates likely to drag.
- Gold (GLD) has been supported by a high level of international tension and the riots that have taken place in US cities, together with further correction in Crypto assets.