Central banks push gold to new highs.
Gold prices and real interest rates always used to be very closely correlated. But since Q1 2022, that’s no longer the case. Gold prices have held up better than anyone thought they would, even though private investors, as expected, greatly reduced their positions in gold ETFs. This break from the norm has almost certainly been caused by central banks. The freezing of Russia’s foreign-currency assets in the wake of its invasion of Ukraine prompted various other countries, including China, to question whether their foreign-currency reserves were safe and to reduce their US dollar holdings. As there aren’t that many other options out there, some central banks began buying gold in massive quantities, which offset the sales by private investors. This trend looks set to continue. We’re therefore maintaining our exposure to gold, although we’re aware it will be hard for the metal to reach new record highs.
USA – investors are overly bullish
2023 ended on a very positive note, with the year-end rally bringing the S&P 500 close to its all-time highs. And the index has already risen above those levels in early 2024. In the initial months of 2023 fears of a recession were widespread, but most economists eventually decided that the US economy was more likely to make a soft landing. And it has indeed proved remarkably resilient in recent quarters, despite the Fed’s unprecedented monetary policy tightening.
So the US avoided a recession in 2023, and very few market observers expect GDP to contract in 2024. Overall, they’re upbeat, not only about growth but also about the prospects of the Fed sharply loosening its monetary policy, which would be a boon for equities.
However, steep interest rate cuts and a resilient economy don’t really go hand in hand. That must mean that the market is wrong about the pace of monetary policy easing or about growth forecasts.
Unfortunately, we think investors are overly bullish on both fronts.
Real GDP growth looks set to be sluggish in 2024. That will make it hard for S&P 500 companies to hit their earnings guidance – double-digit growth seems unlikely, so there could be some harsh reality checks in the first few months of the year.
And while interest rates will almost certainly be cut in 2024, it’s too early to say for sure whether Jerome Powell will make a first move in March. If the policy easing happens later, this will weigh on share prices, which are closely correlated with interest rates. Investors already seem to be revising down their expectations, particularly after the higher-than-forecast inflation figures for December.
Overly bullish investors could be in for some major disappointments in Q1 2024. We’re therefore reducing our exposure to US equities and will wait for the market to correct before adopting a more constructive stance. We’re still broadly positive on this asset class for the year ahead.
This week’s figure : 47%
These are the current odds that the US Federal Reserve will cut rates at its next meeting in March. A week ago the figure was above 80%. The recent uptick in inflation has made investors more uncertain about whether the Fed will soon loosen its monetary policy.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
