Santa is Real

The concept of the “Santa Claus Rally” [1], a stock market phenomenon anecdotally occurring in the seven trading days after Christmas, has been observed since the 1970s. Markets move higher as exchanges tend to be quieter during this period, leaving smaller traders to have bigger impacts on pricing. Groups of investors are said to re-position their portfolios for the new year, hoping to benefit from the “January Effect” [2] or trade for tax reasons. Some claim that markets are more likely to rally because the pessimists are on holiday.

This year, Santa arrived early in the form of Jerome Powell, Chairman of the US Federal Reserve (the Fed). In its last meeting of 2023, the Fed enthused investors by acknowledging the prospect of a material easing of monetary policy into 2024. During the Fed’s post-meeting press conference, Powell revealed that, in effect, borrowing is likely to become cheaper earlier than expected, thereby easing the financial pressure on consumers and corporations alike. Mortgages could become more affordable, and enterprises would likely find it easier to secure financing and expand their operations. All in all, economic growth should face weaker headwinds as a result.

Investors had already priced in much of this easing ahead of the Fed’s meeting. Still, they rejoiced like a child on Christmas day unwrapping the latest pricey video-gaming system they’d asked for but did not expect to receive.

The Fed, too, has good reason to rejoice. Inflation in the US is normalising, the economy remains resilient, consumers continue to spend, and sentiment is holding up [3]. This environment is providing the Fed with the flexibility needed to take their foot off the monetary brake on its own terms without inflicting too much pain on the economy.

Yet other central banks are finding themselves on investors’ naughty lists. While the Fed seems content enough with the shape of the US economy and moderating inflation, the Bank of England and European Central Bank are not quite as comfortable. Inflation remains stickier, especially in the UK, where labour markets are tighter than elsewhere. On the continent, Covid-era government support measures are running out, causing bankruptcy rates in weaker sectors to rise [4]. With policymakers forced into a more aggressive stance in the short term and economies in an altogether more perilous state, the risks of a more serious downturn are greater here than across the pond.

To an extent, what is good for the US economy is good for the world. American consumers buy the world’s products, and American investors finance the world’s enterprises. Thus, the welcome news from the Fed that they will aim to push down US interest rates in 2024 also benefits investors in the UK, Europe, and elsewhere. Still, the global economy is not out of the woods just yet. It has performed remarkably well in the face of diverse challenges over the past four years, from a global health emergency to armed conflict. Still, the central bank moves in 2022 and 2023 away from the previous decade of ultra-low interest rates will, all else being equal, weigh on global economic growth in the coming year [5], even if it does not result in any significant recessions, which is our base case. The US is indicating that it is well-positioned to weather this transition. Others face tougher challenges, and only the next few quarters will show how well they are equipped to deal with them.

As ever, the investment team at SG Kleinwort Hambros looks forward to navigating financial markets with our clients in the year ahead, and we wish all a healthy and prosperous New Year.

Sources:

[1] https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/january-effect/

[2] https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/january-effect/

[3] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20231213.pdf

[4] https://www.ft.com/content/a02cb631-8ae4-4ac2-be45-edfa776ed75f

[5] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20231213.pdf
 

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CA425/Dec/23