Investment markets could have a strong year ahead as the challenges of 2023 continue to ease. Twelve months ago, a US recession that would have hit markets worldwide looked highly likely, and investors were nervous about return-denting interest rate rises.

Not so today.

Inflation has been falling and interest rate rises have been put on pause. Stock and bond markets rose in November after inflation slowed even more, and performed well again in December as America’s central bank the US Federal Reserve (Fed) suggested it could start cutting rates this year.

US inflation did nudge up a little in the 12 months to December, according to the Bureau of Labor Statistics, to 3.4% from 3.1% the previous month. But core inflation, which strips out volatile food and energy prices and tends to be what central banks focus on, still fell.

Things are a bit different in the UK. Inflation has dropped there too, so the Bank of England is broadly on the same path as the Fed, but it’s refused to speculate about when rates could drop. Any UK rate cuts are expected to come at a slower pace than in the US because inflation, while falling, is proving more difficult. 

US economy remains robust

As for that US recession, despite very strong indications of one last year as business activity slowed, it just hasn’t happened.

In fact, the US economy, so crucial to global investors, has remained solid, with low unemployment and steady growth.

America has benefitted from its people having jobs and spending their hard-earned cash as wage growth softens the impact of higher prices. Applications for unemployment benefits there fell to their lowest level in nearly three months in mid-January, according to figures from the US Labor Department. And the manufacturing and housing sectors have done better than expected too.

Monique Wong, from the investment team at Coutts that runs the NatWest Invest funds, says, “Against all odds, the US economy has started 2024 in a remarkably better position than forecast.

“The end of the battle with inflation is now in sight, and we’re seeing high hopes in markets of a so-called ‘soft landing’ – the sweet spot between steady inflation and a growing economy that avoids recession.”

The value of investments can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.

Managing your money for market conditions

The Coutts’ team’s analysis saw a shift in conditions last autumn and started repositioning its investments for customers accordingly. This included increasing their exposure to global stocks in good time to benefit from their improved performance.

They also sold off some of their US government bond holdings, which are likely to underperform as investors move to stock markets in light of current, positive conditions. Stocks, which can be riskier but could deliver higher returns, and relatively safer bonds tend to move in different directions depending on the market mood. And that mood favours stocks at the moment.

Despite improvements to the global outlook, things are looking less positive for the UK economy, which could even fall into recession in 2024. But Coutts currently owns fewer UK stocks than its benchmark. More broadly, the team seeks to reduce the risk of too much exposure to any one country by managing globally diversified portfolios and funds.

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