Financial markets just delivered a powerful reminder
From a top-down perspective, the rally’s expansion beyond the technology sector was fuelled by a combination of US economic exceptionalism and the Federal Reserve’s relatively dovish stance on monetary policy.
Powered by a solid labour market generating jobs that topped forecasts, the US economy grew at an annualised rate of some 4 per cent in the second half of 2023 while other economies fell into recession. Meanwhile, the Fed remained unfazed by three hotter-than-expected inflation readings in the first quarter. Indeed, despite these readings and an increase in the Fed’s own projection for 2024,
Chair Jerome Powell remarked that the inflation story remained “essentially unchanged.” This gave comfort to market participants, driving a wedge between the prospect of higher-for-longer interest rates and continued Fed support for markets.
It’s no surprise, therefore, that the rally extended beyond equities to many other assets. This included bitcoin, which soared 64 per cent and some deem as providing “risk off” exposure and others as “risk on,” and gold, which jumped 8.09 per cent and is considered “risk off” but was bolstered by the challenges facing the Fed in finally getting the rate of inflation down to its 2 per cent target.
The rally crossed borders, with a notable surge in Japanese equities (despite the Bank of Japan’s first rate increase in 17 years and its withdrawal of yield curve control) and greater investor interest in emerging-market stocks.
The first quarter of 2024 reminded us that US stocks can thrive amidst considerable uncertainty, especially when backed by a transformative sector narrative and a supportive central bank. Investors should cheer this environment while being mindful of the need to extend the rally’s drivers beyond these two influences.
Bloomberg Opinion
