The Santa Claus Rally arrived early this year as investors enthusiastically embraced risky assets in the face of easing rhetoric from Fed members and a slowdown in inflation.
The dollar index plummeted by 3.5% in a month, with the S&P 500 surging by 9.50% and the Nasdaq by 11.4%. Meanwhile, yields on ten-year Treasury bonds dropped by almost 12%.
Gold also saw gains, reaching a six-month high of $2030, partly due to fears of escalating conflict between Israel and Hamas.
Analysts predict that gold could test a near all-time high of just under $2,075 per ounce by the end of 2023, with ING expecting the average to be around $2,100 per ounce in the fourth quarter.
The sustained demand from central banks, with a record 1,136 tonnes of gold purchased last year and 800 tonnes in the first three quarters of 2023, is also working in favor of the precious metal.
Triggers of Change
A shift in sentiment has been attributed to the FOMC’s Waller and other speakers, who argue that current Fed policy is sufficient to bring inflation down to the 2% target given the ongoing decline in inflation.
This suggests that no further rate hikes are expected this year and next year, the Fed may reconsider its monetary policy, as predicted by the market.
What is the outlook?
Goldman Sachs analysts express optimism about the global economy and markets, anticipating a 2.6% increase in global GDP in 2024 following 2.7% growth in 2023.
BMO Capital Markets Chief Investment Strategist Brian Belski forecasts a 13.6% increase in earnings per share for the S&P 500 in 2024 to $250, and several research firms expect the stock market index to break all-time records, with different predictions for the S&P 500.
Another reason for optimism
Recent optimism has also been linked to an increase in the amount of money held by central banks, with the rate of increase in reserves predicting the monthly performance of the S&P 500.
Despite a reduction in the balance sheet, the increase in reserves was driven by the government’s decision to finance a significant part of the fiscal deficit through treasury bills, and the Fed’s message to hold rates higher for longer, encouraging money market funds to use the reverse repurchase facility to purchase bills.
Observing the evolution of the volume indicator will be crucial in understanding how equities may be affected as available investment money decreases.
