State of Play – Thrills, Spills and Financial Markets

Arm Wrestle

2024 is shaping up to be an arm wrestle between market economic expectations and realities, company earnings and investor sentiment.

The latter became exceedingly bullish across the backend of 2023 as media pundits and bond traders began making strong bets on the number of interest rate cuts international and Australian markets could expect throughout 2024. First it was six rate cuts starting from March in the US, followed by five and now some consensus has settled on four. Bond markets now estimate two rate cuts here in Australia during 2024. It has naturally come as welcomed news to investment markets, including Australia, which rock-and-rolled its way to an impressive three-month return of circa 8% on the ASX, and new all-time highs in US, Australian and selected European markets. Tempered annual inflation prints here (4.1%), and in the US (3.4%), seemed to confirm what talking heads had been saying all along: ‘it’s possible we’ve seen the peak of this interest rate tightening cycle’. This might be true but keep in mind that both readings still sit above central bank targets of 2-3% which means the exact amount of interest rate cuts in 2024 may not land as highly as once thought.

While the case for dodging recession in Australia continues to strengthen, and to lesser extent in the US, this year company earnings performance will likely become more influential on investor sentiment now that inflation concerns are deemed ‘old hat’. Indeed, share market valuations are comfortably above long-term averages in the US, India and Australia, meanwhile Chinese and Japanese markets are below long-term averages. As markets become more and more priced for perfection throughout 2024, the market reaction to companies that don’t perform as well as expected will be swift and brutal. February is of course “Earnings Season” for ASX-listed companies which will provide the first indication on how quickly or otherwise underwhelming performance will be forgiven.

Nonetheless, at Wakefield Partners, our investment strategy focuses on the long term for our clients. Short-term results and outlooks seldom influence our investment recommendations. We prioritise companies with established long-term profitability, stable management, and sustainable dividends. Even if they encounter occasional setbacks, these companies, which form a significant portion of our portfolios, are resilient. Cash and fixed-interest investments, integral to most of our portfolios, are now making positive contributions to the overall performance.

Wishing everyone a prosperous 2024. Speak to one of our advisers today to discuss how your investments can best navigate current conditions.

This website contains general advice which does not consider your particular circumstances. You should seek advice from Wakefield Partners who can consider if the general advice is right for you.