Market Shifts Ahead

January kicked off with a bit of a slowdown in the financial markets following the festive season’s highs. The last two months of 2023 had been extraordinary, but the beginning of the new year saw a shift. Both equity and bond prices experienced a slight decline as trading activities returned to more typical levels. Notably, yields in the UK and the US rose to 3.80% and 4.05%, respectively.

The equity market reacted in a predictable manner, with a modest fall of about 1%-2% over the week. Tech-related stocks notably underperformed during this period.

From a professional investor’s standpoint, this phase seemed to be a period of reassessment and realignment. Lower yields on bonds and large-cap equities prompted some investors to secure near-term profits. This strategy could be part of a broader plan to create space for new investment opportunities. With the reduced cost of capital, many companies are seizing the opportunity to raise funds through new bond issues, and equity issues such as IPOs and convertible bonds. These offer an attractive mix of bond-like security and equity growth potential.

This shift in strategy reflects optimism more than caution. Companies are keen to raise capital, seeing the potential to generate returns that surpass the cost of capital, even at the current higher rates. Investors, too, seem enthusiastic about these new opportunities. This indicates a more balanced capital market compared to the overly optimistic sentiment in December, when corporate treasurers preferred to wait until the new year before making moves.

However, the anticipated narrative of global policy rates cuts in the second quarter faced some challenges. In Europe, inflation data met expectations but didn’t fall below them. In the US, employment data mirrored November’s surprisingly low 3.7%. The end of the year also saw tighter employment, potentially boosting consumption but doing little to curb strong wage growth. While low inflation data may provide some relief in the short term, expectations of rate cuts in March and April now seem optimistic.

Looking ahead to the US election, the potential candidacy of Donald Trump is a topic of interest. Historically, Trump’s political moves have attracted global attention, but interestingly, they haven’t significantly impacted investors. The 2020 election, despite its political drama, didn’t notably affect the US stock market. Similarly, the market quickly recovered after the initial shock of Trump’s 2016 victory, even leading to a ‘Trump rally’.

As the 2024 election approaches, it’s uncertain how the markets will react to Trump’s potential candidacy, especially considering his legal challenges and the possibility of him winning the Republican nomination. His current polling lead against President Biden, both nationally and in key states, adds to the speculation. The outcome of the election and its impact on the markets are still uncertain, with various factors such as Biden’s candidacy and economic improvements playing a role.

Finally, the long-term outperformance of the US market is under scrutiny. Whether this trend will continue, especially as US assets become more expensive compared to Europe and emerging markets (EMs), remains to be seen. A significant market shift could be triggered by factors such as the political climate and public sentiment in the US. For example, a segment of the US population, particularly those who are liberal, educated, and urban, view the possibility of a second Trump presidency with concern, fearing its impact on democratic institutions. This demographic, which generally represents a larger proportion of domestic investors, could influence market dynamics in the event of a Trump victory.


This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.

Please note, past performance is not a reliable indicator to future returns. Your investment may fall as well as rise, and you may not get back what you put in.