At the start of th
is year the IMF was especially gloomy about the outlook for 2023 saying that they expect that a third of the global economy would fall into recession, against a backdrop of slowing global growth, and central banks that looked set to hike rates even further over the coming months.
This gloomy outlook came about despite a strong end to 2022 and which saw global equity markets rally strongly from 2-year lows back in October 2022, although we still finished the year lower, with US markets getting hit especially hard.
After the negativity of 2022, the early days of 2023 saw European markets get off to a flier with sharply slowing headline inflation in the US, as well sharply slowing PPI inflation fuelling optimism that central bank rate hikes would soon be coming to an end, with bond markets increasingly pricing in the prospect of rate cuts before year end.
This reasoning always came across as a triumph of hope over expectation given that even then central bank terminal rates were still well below the level of headline inflation.
Nonetheless there was still an expectation that European markets would perform much better, and even outperform US markets where valuations were, and still are, well above their long-term averages, especially since it was widely expected that more interest rate hikes were on the way.
For the first half of this year this narrative of European outperformance initially played out well with record highs for the FTSE100 which achieved a new record high above 8,000 in mid-February, the DAX new record highs in May, June and July, and the CAC 40 in April.
While European markets had a solid H1, US markets went against the consensus and performed even better despite the Fed Funds rate rising from 4.5% at the start of this year, to finish at 5.50% when the Fed last raised rates back in July.
This consensus was largely driven by the idea that a move from a TINA (There Is No Alternative) world, to a world where money now has a value, would see many tech stocks valued against a higher benchmark when it comes to their growth potential.
After all, if you could get achieve a 5% return on anything from a 6-month US T-bill, or a 2-year bond, why take the risk on an expensive tech stock.
As we now know it hasn’t turned out like that, although if you scratch below the surface the rebound in US markets has been largely driven by a small cohort of US companies, called the “Magnificent 7” which have driven most of the gains for US markets.
These 7 companies, Nvidia, Meta Platforms, Amazon, Alphabet, Tesla, Microsoft, and Apple have helped push the likes of the Nasdaq 100 higher to the tune of over 40% year to date, while the S&P500 has gained a slightly more modest +15%.
Compare that to the more domestically focussed Russell 2000 and the difference is even starker with that US index only modestly higher on the year, although the performance here has improved somewhat in the past few days after Chairman Powell’s surprise pivot when it comes to the likelihood of rate cuts at his recent press conference.
Since the last Fed rate hike in July, we’ve seen the European Central Bank raise rates from 2.5% at the start of this year to 4.5% back in September, while the Bank of England has been equally as aggressive, hiking from 3% at the start of this year to current levels of 5.25%.
Having managed to outperform its peers in 2022, the FTSE100 has underperformed in 2023, despite posting an early record high in the early days of 2023, while the Nikkei 225 has surged, helped by the weakness of the Japanese yen.
