This time last year we outlined a Santa Paus scenario that we suggested might evolve in 2023. Looking back now at the somewhat surprising year 2023 turned out to be, the prognosis wasn’t that far from the mark, at least so far as the economy, inflation and interest rates were concerned. Converting that into impressive investment returns has been a more uneven challenge beyond the charmed circle of the Magnificent Seven, albeit each of them for rather different reasons and not solely driven by the new dawn of artificial intelligence.
This year it seems the reprise should be titled Santa Pivot following the US Federal Reserve’s Chairman Jerome Powell apparently holding back from further interest rate hikes and now guiding for three cuts in 2024. This has given rise to much commentary and controversy in the news studios and strategy forums where his remarks have been taken as some kind of vault-face, ‘throwing in the towel’, a distinctly changed tack. What is clear is that his press conference following the last meeting of the Federal Open Markets Committee added fuel to the fire already raging in bond and stock markets for the surging returns that have defined the last few weeks of the year, breaking records, setting new all-time highs and delivering a year of economic and markets performance no one had expected twelve months ago.
What seems to us on the Endeavour Fund as less than clear, however, are the grounds for consternation with which his comments have been received. The Chairman and his FOMC colleagues have been clear and consistent on four central pillars of policy and remain so: that the economy has been more resilient than the market feared; that inflation would subside as the transitory causes wore off; that rate cuts were in the forecast for 2024; and that this would be in advance of inflation actually reaching its target of 2% to avoid an overshoot to the downside. All of which remain both possible and likely with the central bank maintaining either a restrictive policy stance or an easing policy stance, whichever is appropriate to bring the inflation rate to its medium-term target. Nothing much has changed from the script except one further rate cut in the guidance perhaps giving them the cover they prudently expect they might need in the politically charged atmosphere of this particular election year.
For sure central bankers are winning the battle against inflation and consumers continue to enjoy the benefits even if as voters they remain pretty disillusioned with this economy. And they have created themselves enough flexibility to act, data dependent as always, without risking too much of a margin of surprise to markets given just how much uncertainty still remains in the outlook. As confidence does indeed continue to lift, the US expansion has a reasonable chance of extending another year and gently re-accelerating beyond, supported by rising corporate earnings, increasing employment and improving real disposable incomes. Given all that good news, it is the time of year for us to hope that the grim geopolitical backdrop must surely improve and to celebrate an unprecedented 50% of the world’s population will be going to the polls in the free world. Happy Christmas and best wishes for the New Year.
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