Political events
The situation in the Middle East significantly impacted global markets. The ongoing violence tested international relations and agreements, while also affecting various sectors like energy, consumer goods, and telecommunications. Companies faced challenges such as supply chain disruptions and increased shipping costs. The conflict also threatened natural gas production in the Mediterranean, raising concerns for Europe’s energy supply. This situation, coupled with currency volatility, led to potential rises in global oil prices, affecting consumer demand and overall market conditions.
The situation on the markets
The Federal Reserve held the federal funds rate steady at 5.25%-5.50%, marking its third consecutive hold and indicating a possible shift from rate hikes to future cuts. The market positively received this change, along with signs of softening inflation and a cooling labor market. Core PCE, the Fed’s preferred inflation measure, continued to decrease, nearing the 2% long-term target. The labor market remained strong, but there were indications of slowing down, reinforcing the belief that peak interest rates may have been reached.
The impact on the asset classes equities and bonds
The financial markets experienced notable shifts, particularly in the asset classes of equities and bonds. These changes were influenced by the Federal Reserve’s interest rate decisions, evolving economic indicators, and market sentiments.
Equities
In the equities market, the trend was largely positive. The decision by the Federal Reserve to hold the federal funds rate steady played a crucial role in this upswing. The S&P 500 rose by 4.5%, while U.S. small-cap stocks, which had previously lagged, made a notable comeback with a 12% return in December. Large-cap stocks also saw healthy gains, with sectors like consumer discretionary, real estate, and industrials leading in returns. The overall market performance was boosted by lower expected future interest rates and positive end-of-year seasonality.
Globally, European and Asian markets also responded positively, with the Stoxx Europe 600 and the Asia-Pacific MSCI index both showing modest gains, reflecting a global relief.
Bonds
The bond market witnessed its best performance in decades, a development welcomed by investors with balanced, moderate, or conservative portfolios. The decline in U.S. Treasury yields, with the 10-year yield dropping below 4%, was a key factor driving this rally. The yield curve, reflecting these lower yields, indicated a significant market shift in anticipation of future interest rate trends. This decrease in yields was particularly pronounced in the longer-duration fixed income yields, which are more sensitive to future interest rate expectations and changes in Federal Reserve policies.
Globally, bond markets in Europe and Asia mirrored this trend, with government bonds in Germany and Japan experiencing similar declines in yields, suggesting a synchronized global bond market response to U.S. monetary policy and global economic outlook.
What are the implications for the Everon portfolios?
As we closed out 2023 under positive market conditions, in December we maintained a broad diversification in all our strategies by including a high number of individual instruments and keeping a constant asset allocation. This allowed us to achieve a positive performance across the board, from the global to the Switzerland and sustainability focused strategies.
