Written by Isaac Robinson
The SP500 began the year by rising steadily through January and early February. However, the 2023 United States banking crisis, which saw 3 small to mid-size US banks fail, took its toll on the markets. At the same time, investment banking giant Credit Suisse collapsed due to persistent losses, poor risk management, and repeated scandals eroding the bank’s reputation. The US government responded by stepping in and offering financial assistance to Signature Bank and Silicon Valley Bank, and the Credit Suisse crisis ended after it was purchased by fellow Swisse banking giant UBS. As a result, the markets began to rebound.
The market remained flat from April until the end of May, marking a period of investor uncertainty. Various economic indicators were suggesting that the economy was in expansion, however the recent banking events and talks about a recession at the tail end of 2023 left investors with conflicting information. There was also uncertainty surrounding the future path of interest rates.
The market began to rise at the beginning of June, a trend that continued until the end of July. Tech stocks played a significant role in this rise, as investors became increasingly interested in artificial intelligence. Also, investors began to grow optimistic that the Federal Reserve’s rate hikes would come to an end as economic data in July pointed towards easing inflation.
From the high at the end of July, the market fell for 3 consecutive months from August to October. Economic data emerged suggesting that the Federal Reserve’s battle against inflation may continue after discretionary spending rose by roughly double consensus estimates. This led to fears from investors about interest rates remaining higher for longer. Investors were also concerned about the growing crisis in China and the Israel-Hamas war.
However, this period of decline was followed by a period of sharp growth beginning in November and continuing through to December. Investors reacted positively to better-than-expected earnings, and encouraging economic data showing that inflation and the labour market were continuing to cool lead to investors being hopeful that the Federal Reserve would not increase rates any further. Investors reacted so positively that the 8.9% increase in November was one of the index’s top 20 months in history. Overall, the SP500 is up 21% from the beginning of the year at the time of writing.
The Australian market was highly correlated with the US at the start of the year, rising throughout January and early February, falling in February and March, and then rising again throughout late March and early April. However, the ASX200 began to deviate from the SP500 in mid-April, trading sideways until the end of July due to mixed signals about the future of the Australian economy while the SP500 rose.
Retail sales were stagnant over April, indicating that Australian households were beginning to feel the impacts of inflation. In June, data revealed that inflation had in fact increased and the Reserve Bank of Australia decided to increase rates. However, in July, China unveiled plans for new stimulus to prop up its economy, leading to investor optimism about future growth in iron ore demand.
The ASX200 then rejoined the SP500, falling from August to the end of October, and then rallying throughout November and December on news that inflation was slowing in the world’s largest economy. Overall, the ASX200 is up 4.5% from the beginning of the year at the time of writing.
The Chinese market moved in an entirely different pattern to that of the US and other economies around the world. Despite strong performance over January and February, the market began to move sideways as new data led investors to feel uneasy about China’s economic recovery from Covid-19. The market began to fall in May, as data showed China’s economic recovery was in fact slowing down. This downward trend continued throughout the rest of the year.
More bad news arrived in June, as data showed that demand for exports had slowed, the housing market was in a slump, and that business and consumer confidence was weak. The Chinese government attempted to calm the market by reporting that the Cabinet had discussed plans to boost economic growth. As the result, the market rallied in July. However, the rally was short lived as Evergrande, a Chinese property giant that defaulted in 2021, asked US Courts to approve their restructuring plan to avoid bankruptcy. In August, data also revealed that Youth unemployment was over 21%, their economy was experiencing deflation, and that new home prices had fallen across 70 cities.
In September, the Chinese government once again attempted to stabilise the market by acknowledging the economic challenges facing China and issuing a number of pro-growth measures aimed at stimulating consumption and reviving the property market. An official data release followed that showed the economy may be beginning to stabilise as industrial production, retail sales, and lending activity rising more than forecasted. While this did calm the market temporarily, the seemingly never-ending string of bad news soon sent China’s market down once again. In October, Country Garden, formerly China’s largest property developer, announced that it was unable to meet all of its offshore debt payments even, after receiving a 30-day grace period. Also, home prices fell for the 3rd consecutive month. This lead to concerns around the health of the Chinese banks that loaned large sums to the property sector and Chinese households, who have 70% of their wealth tied up in property.
Finally, in December, US ratings agency Moody’s downgraded China’s sovereign debt due to the ongoing property crisis and their heavily indebted local governments. Overall, the SSE Composite Index is down nearly 4% from the beginning of January at the time of writing.
December Economic Update:
Australian Economic Update:
In Australia, Gross Domestic Product (GDP) rose by 0.2% in the September quarter, marking 8 consecutive quarters of GDP growth. This growth was driven by increased government consumption and capital investment. Growth in both household consumption and GDP over 2023 has slowed due to sustained cost of living pressures and higher interest rates, with household saving to income ratio decreasing to 1.1% from 2.8%. The RBA increased their cash rate target 0.25% in November to 4.35%, the highest level since late 2011. While leaving rates at 4.10% was discussed as the tensions in the Middle East were likely to dampen consumer confidence and global demand, the RBA made it clear that their goal of controlling inflation was of greater importance. In the September quarter, annual CPI inflation was 5.4%, down from 6% last quarter. The most significant price increases were in automotive fuel, rent, and electricity. Inflation continues to outpace wage growth at 4.0%, although it is up from 3.6% in the June quarter. Unemployment dropped from 3.7% to 3.6% in September but increased back to 3.7% in October. From September until now, the Australian Dollar has strengthened against the US Dollar (0.64 to 0.66) and the Chinese Yuan (4.68 to 4.71).
World Economic Update:
The United States is responsible for approximately 25% of global GDP. Due to the size of their economy, the economic health of the US has a global impact. GDP grew at an annualised rate of 5.2% in the September quarter, compared to 2.1% in the June quarter. The Federal Reserve has decided to not increase rates again, with the target remaining at 5.25 – 5.50% since the increase in July. However, the Fed Chair Jerome Powell’s main message after the Fed’s November meeting was that officials are not yet sure if they have raised interest rates enough to curb inflation. However, the Fed is predicted to not increase rates as inflation fell from 3.7% in September, to 3.2% in October, and 3.1% in November.
China is responsible for approximately 19% of global GDP, and is also very important on the global stage, especially to us here in Australia. According to the National Bureau of Statistics of China, annualised GDP growth was 4.9% over the September quarter, down from 6.3% in June. Due to the economic troubles that China is currently facing, the People’s Bank of China decided to cut rates from 3.55% to 3.45%. China has also entered a period of deflation. Inflation fell to 0% in September, went negative in October at -0.2%, and then fell again in November to -0.5%.