Santa
Claus Rally came a little early this year. Investors dived headlong into risky
assets against a backdrop of softening rhetoric from Fed members and slowing
inflation.
As a
result, the dollar index fell by 3.5% in a month, the S&P 500 soared by
9.50% and the Nasdaq by 11.4%. Meanwhile, yields on ten-year Treasury bonds
plummeted by almost 12%.
Gold
did not disappoint either, rising to a six-month high of $2030. Fears of an
escalation of the war between Israel and Hamas also contributed to the rise
in gold prices.
Analysts
say the yellow metal could test an all-time high just below $2,075 per ounce by
the end of 2023. ING expects gold to average around $2,100 per ounce in the
fourth quarter.
Also
working in the precious metal’s favor is the sustained demand from central
banks, which bought a record 1,136 tonnes of gold last year and 800 tonnes in
the first three quarters of 2023.
Triggers
of Change
Let us
now delve deeper into the reasons for optimism. Starting with the FOMC’s
Waller, who argues that, with inflation continuing to fall, it makes no sense
to keep the rate at its current high level.
Other
speakers maintain a similar stance, essentially rephrasing the message that
current Fed policy is already adequate to bring
inflation down to the 2% target.
This
probably means that we will not see any more rate hikes this year and that next
year, as the market predicts, the Fed will reconsider its monetary policy.
What
is the outlook?
In
their strategy for the coming year (“The hard part is over”), Goldman
Sachs analysts have expressed a relatively optimistic view of the global
economy and markets.
They
expect that after the 2.7% growth of the world economy in 2023, GDP will
increase by 2.6% in 2024 and 2.7% in 2025.
The
most crucial point is the limited risk of a 15% recession in the US.
According
to BMO Capital Markets Chief Investment Strategist Brian Belski’s forecast,
earnings per share for the S&P 500 in 2024 will increase by approximately
13.6% to $250.
As far
as the stock market is concerned, Deutsche Bank, BMO Capital Markets and BofA
Global Research expect the index to break all-time records, exceeding 5000
points.
Interestingly,
Wells Fargo sees no potential for significant growth from current levels and
expects a figure of 4625 points. Time will tell who is right.
Another
reason for optimism
Another
invisible reason for the recent surge in optimism was the increase in the
amount of money held by central banks.
Usually,
the rate of increase in reserves predicts the monthly performance
of the S&P 500, and the recent growth in reserves occurred at the same
time as the market’s rise about a month ago.
Despite
the reduction in the balance sheet, the increase in reserves came about because
of the government’s decision to finance a significant part of the fiscal
deficit through treasury bills.
In
addition, the Fed’s message to hold rates higher for longer has encouraged
money market funds to use the reverse repurchase facility to buy bills.
Thus,
once the available investment money is reduced, equities could start to
struggle. In this regard, it is crucial to follow the evolution of the volume
indicator.