As each year slips away, I always find it fun to think about what the next year will bring for financial markets. This year I am going to up the ante and introduce the discipline of writing down my thoughts and making them public! I am a live by the sword, die by the sword kind of person so here it goes!

Truth be told, there is no way I would have predicted that 2023 would be closing out with many markets close to record highs. For 2023 CYTD the S&P500 is up close to 25%, NASDAQ +45% and the ASX200 lagging but still up 8%.  Goldman Sachs estimates that approximately 63% of the returns of the S&P500 have been driven by the “Magnificent Seven” (Apple, Microsoft, Google parent Alphabet, Amazon.com, Nvidia, Meta Platforms and Tesla). However, in the last month, there have been significant increases in almost all equity markets and the sectors and stocks participating in the market uplift have broadened significantly.

Is this a Santa Claus rally? Or is this a new sustainable trajectory for equity markets and a sign of more to come for 2024?  Time will tell. Certainly, equity markets are currently slamming down the happy juice fuelled by a recent decline in long term bond yields and the potential for rate cuts. But what if the rate cuts do not eventuate? We all know that the propensity of central banks to get it right is practically 0% (no rate rises in Australia until 2024, anyone?) and history has shown us that engineering a soft landing is very difficult. But the behaviour of equity markets is telling us that a soft landing and good times are on their way. The bond market on the other hand looks like it is starting to think about a recession and anyone who has been around for long enough will tell you a recession is nasty. Of course, I do not have a crystal ball, but my best guess is that markets are overstretched and open to disappointment. The form of that disappointment? There could be many; the rate cuts don’t eventuate? Inflation turns out to be stickier than expected? A recession hits, or hits harder than expected? Maybe geopolitical disturbance shakes markets out of their happy place? History shows, when expectations are high, it does not take much to disappoint.

In this uncertain environment, there are a few things I know for sure (well, I think I know for sure!):

• Interest rates are not going back to where they came from. We are all in a new higher rate environment, we need to get used to it and this will have to be reflected in long term asset prices.
• Central banks are not to be trusted. Globally their track records are not great and historically they have proven they have little clue about what is really going on in the economy, so anything they say is to be taken with a grain of salt. That said their job is hard, trying to control the speed of an economy with such a blunt instrument is like trying to catch water in a sieve.
• The ridiculously low interest rate environment of the past few years has resulted in capital being allocated to stupid things (I am looking at you, Crypto) that never would have past the pub test in a higher rate environment. That is yet to be unwound. I also worry about the broad exposure of a lot of high net-worth investors to a lot of poor quality private equity and venture capital funds, investments which were driven by essentially free money. In my opinion, the chickens are yet to come home to roost for those investors. There are good operators out there in that sector, you just need to make really sure you are in one of them.
• Private credit is a crowded dangerous trade. This is the sector of the market that I worry about the most. If something is going to blow up in 2024 I think this will be it. This sector was driven by the search for yield in the low rate environment and in Australia by the disintermediation by the banks. Many high net-worth investors have large exposures here, but I question whether investors really understand the risks they are taking and if it is worth the risk given the level of essentially risk free term deposit rates. A recession is awful for investors in this sector as the regular income turns into asset lock ups and fights to get your capital back. Not fun and not worth given risk free rates are now higher.

Markets are endlessly interesting. I find things never turn out as you expect but let’s see what 2024 brings!

Have a great break!

Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently

General Advice Warning: This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. It does not represent and is not intended to be personal advice.  Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.  We strongly suggest that you seek professional financial advice before acting.

Wealth Differently Pty Ltd AFSL 547820.