Welcome to the December edition of our Stock Market Trends and Updates, where we examine recent financial events and navigate through a market landscape influenced by pivotal elements.

Whilst we’ve seen markets fluctuate in recent months, the Fed expects to keep rates unchanged in the coming month. However, there’s no guarantee that a rate increase won’t occur, leaving investors uncertain while the Fed and the market disagree on what’s coming.

Whether you’re an experienced investor or beginning on your financial journey, our goal is to offer valuable insights into the current condition of global stock markets. Read on as we dissect the market fluctuations – examining the latest trends, changes, and notable occurrences shaping this December.

Market Dynamics

Federal Reserve’s December decision and the road ahead

The Federal Reserve announces its next interest rate decision on 13 December, and indications suggest rates will likely hold steady between 5.25% and 5.5%. The decision stems from the recent Consumer Price Index report for October, which reveals a decrease in inflation, currently at 3.2% annually. The underlying rate, excluding food and energy, remains at 4.0%. Despite the slowdown in inflation throughout 2023, it still exceeds the Fed’s 2% target, with services inflation remaining relatively high.

While some Fed officials suggest the possibility of raising rates, market forecasts disagree. The upcoming 13 December meeting is expected to maintain the status quo, with a minimal 1 in 20 chance of a rate hike

according to the CME FedWatch Tool. The Fed generally avoids surprising the markets with unexpected rate decisions, but a few officials, like Fed Governor Michelle Bowman, hint at potential future increases in response to inflation concerns.

Looking ahead to 2024, there’s a gap between market expectations and the views of Fed policymakers. The market anticipates a likelihood of rate cuts, while the Fed remains open to rate increases. The possibility of a rate hike in December is minimal, but decisions in early 2024, specifically on 1 February and 22 March, could be pivotal.

Talk of a recession

Another factor in the equation is the potential risk of a U.S. recession in 2024, suggested by indicators such as the inverted yield curve  and a potentially cooling job market. Despite these red flags, the economy has shown robust growth in Q3 of the current year. The Fed acknowledges the recession risk but focuses on returning inflation back to the target, downplaying concerns based on recent economic data.

Even if rates remain unchanged in December, the Fed’s Summary of Economic Projections, to be updated at the meeting, will provide insight into its outlook for 2024. The Fed has softened its tone on future rate hikes but still considers them a viable option for monetary policy. Still, their sentiments may yet shift in December based on incoming economic data.

Geopolitical risks and 2024’s full election calendar

Geopolitical risks are poised to be the primary threat to the economic outlook in 2024, with ongoing global conflicts coinciding with crucial elections across major global powers. Financial institutions anticipate a more complex geopolitical backdrop, leading to increased separation among key regions amplifying market volatility and uncertainty.

According to a global risk survey by Oxford Economics, nearly 40% of respondents view the Israel-Hamas conflict as a significant risk to the global economy in the next two years.

Concerns over China-Taiwan and Russia-NATO relations are widespread, making geopolitical tensions the top business concern for the near and medium term, with 62% of businesses citing it as a significant risk. Furthermore, the International Monetary Fund forecasts a slowdown in global growth to 2.9% in 2024, with varying performance across regions.

Goldman Sachs Asset Management’s 2024 investment outlook  highlights the U.S., U.K., South Africa, India, Taiwan and Russia elections as contributors to potential economic divergence.

Rising geopolitical tensions could increase trade restrictions and economic fragmentation, prompting nations to invest heavily in financial security. The ongoing Russia-Ukraine conflict is expected to spill over into 2024, while concerns over the Israel-Hamas conflict potentially drawing in nearby states pose additional risks, particularly in the Middle East.

The most economically consequential geopolitical situation is China’s multifaceted tensions with the West, especially regarding competition and Taiwan. Supply chain fragmentation is increasing due to trade tariffs and post-Covid logistical concerns, leading to “friend-shoring” or “near-shoring” policies.

Despite challenges, sustained disinflation may allow central banks, including the U.S. Federal Reserve, to consider interest rate cuts in the second quarter, mitigating headwinds to growth and supporting capital expenditures for an anticipated cyclical economic rebound.

Final thoughts

In navigating market uncertainties amidst a plethora of factors, investors must remain resilient despite the winds of the financial climate blowing in different directions at a whim.

As reported by MarketWatch, Central Banks are cutting interest rates, which further questions the Fed’s next move.

Bonds, meanwhile, are set to see a positive upturn in 2024, following a negative spell, which could be good news for investors.

While the markets may experience sharp swings and uncertainties, it’s essential to remember that these dynamics are inherent to the investment landscape. Staying well-informed, maintaining a diversified portfolio, and adopting a long-term perspective can help investors weather the storm and seize opportunities that arise during these challenging times.

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