Markets cheered by potential Fed pivot

SINGAPORE – Major global equity markets continued rallying into their fourth week, buoyed by expectations that central bank rate hikes are over and 2024 could possibly see a pivot towards easier monetary policy.

This despite concerns in some circles that higher-for-longer interest rates could potentially damage consumer demand (the primary driver of economic growth) and corporate profits (the primary determinant of market valuation), and ultimately drive economic growth lower.

On Wall Street, key indexes capped off Thanksgiving week with their best monthly run in three years. The Dow Jones Industrials’ gain of 1.27 per cent last week took it to its highest levels since July as it closed Nov 24’s session at 35,390.15 points. The marquee Wall Street index is now up 8 per cent in a month.

The S&P 500, which has a much broader spectrum of stocks, gained 1.13 per cent to 4,559.34 points, taking its monthly gain to over 10 per cent. Some analysts expect this broad-based index to hit 5,000 by the first quarter of 2024. Meanwhile, the tech-heavy Nasdaq notched up a 1 per cent gain to 14,250.85, adding up to a monthly rise of 13 per cent.

But in Singapore, the market remained in a moribund state, with the Straits Times Index remaining range bound and ending the week down 0.9 per cent to 3,094.81 points. As I’ve pointed out in my columns before, the local bourse seems to be stuck in a cycle of low liquidity and pessimism, with investors missing gems in its midst.

Take the case of LHN Group, for example. As I projected, the company announced a generous dividend after a 56 per cent jump in second-half net profit to $21.3 million. Its 2 cents per share payout brought its full-year total dividend to 3 cents per share – translating into a yield of almost 9 per cent.

Then there is Straco Corp, which reported net profit of $16.3 million for its third quarter ending September 2023. This put the company firmly back in the black, compared with a narrow $175,000 profit during the same time in 2022. This company, which owns the Singapore Flyer, the iconic Shanghai Ocean Aquarium and Underwater World Xiamen, has been generous with its annual dividends.

While much of the investor attention here has focused largely on the banks, big caps and conglomerates, there are numerous second liners and smaller listings – like Dyna-Mac, Frencken, Tiong Woon, Mermaid Maritime, Grand Banks, Kim Heng, ISO Team, Kingsmen Creatives – which are attractive from the perspective of growth, governance and yield. The market should show them some love.

So what’s next?

The minutes of the last Federal Reserve meeting seemed to confirm that the US central bank is largely done with rate hikes, unless progress towards its 2 per cent target inflation proves insufficient. But the notes also indicate that the Fed’s restrictive stance would remain in place for some time. That said, the market now believes that the Fed will pivot towards an easing stance by the middle of 2024, if not sooner.

The big unknown is the lagged impact of almost two years of monetary tightening on economic growth numbers. Most economists reckon there will be an economic slowdown in the United States next year. It is a question of how severe this deceleration will be.

Meanwhile, China is still caught between a rock and a hard place as the government tries to get to grips with the property market crisis, manage its financial markets and rejuvenate the economy.

If these two engines of global growth sputter, the world will feel the chill. But Mr Vasu Menon, managing director for investment strategy at OCBC, remains sanguine.

“Our view is that the US economy may slip into a modest technical recession next year and the Fed could cut rates by as much as 75 basis points as inflation falls decisively towards the US central bank’s 2 per cent target,” he said. “Along with Fed rate cuts, we see US 10-year bond yield falling sharply to 3.25 per cent in the next 12 months, a decline of more than 1 per cent from current levels.”

He also sees efforts by the Chinese government to use both fiscal and monetary policy to stem falling property prices and company defaults, eventually helping to improve sentiment and benefiting Chinese equity markets. “Any positive developments in China and the potential for Middle East tensions to ease could also be tailwinds for the markets,” he added.

But the biggest tailwind will be a Fed monetary easing. If one were to take history as a guide and go back to the playbook from the early 1980s – when the Volcker-led Fed dealt aggressively with high inflation and brought it down eventually – there is a high chance that equity and bond markets could rally through 2024. Given that there is over US$6.6 trillion (S$8.84 trillion) of cash sitting on the sidelines and in money markets, the strength of a rally following a Fed pivot could be immense.

Market strategists are advising investors to remain invested. But tread carefully. Be selective, buy quality, buy gradually and keep a diversified portfolio. Do some homework.

The week ahead will be chock-a-block with economic data.

The most important data, given the impact it can have on inflation expectations and Fed policy, will be the US Personal Consumption Expenditures (PCE) inflation data for October, due on Nov 30. Other data that could impact markets includes the November Institute of Supply Management (ISM) Manufacturing Index.

On Nov 27, the US will release its new home sales data for October. We will also see the US’ Dallas Federal Reserve Manufacturing Activity Index for November which helps gauge the latest strength in US manufacturing activities.

The US will also release its second measure of third-quarter GDP growth on which the market expects a slight revision of up to 5 per cent, from the previous estimate of 4.9 per cent.

On Nov 30, the US will also release the latest data on its initial and continuing jobless claims, and the PCE headline and core deflator for October. Personal income and spending data for October are also scheduled later in the week and markets are expecting them to signal slower consumer spending.

Other information from the US will include the October construction spending data and the ISM Manufacturing Index for November, where the market expects an uptick to 47.7 from 46.7 in the previous month.

Across the pond, we will see the euro zone’s economic, industrial and services confidence indexes, which will indicate the latest strength of the euro-zone economy. We shall also see the euro zone’s headline and core consumer price index data for November to gauge inflationary pressure in the region.

On Nov 30, we will see China’s National Bureau of Statistics Manufacturing and Non-manufacturing Purchasing Manager Indexes for November. The market will use this to gauge the latest momentum in China’s growth recovery. On Dec 1, China will release the November Caixin Manufacturing Index. The market is expecting the index to stabilise at just below the 50-mark.

In short, there is a lot of data for the market to digest this week.