In a welcome sign of investor optimism and risk appetite, the ASX200 accumulation index (which includes dividends), has soared 1.66% to a new record high today.
This surge can be attributed to several key factors, including declining inflation rates, an anticipated easing of interest rates by central banks in 2024, and a general improvement in investor sentiment. The backdrop to this market scenario is a unique blend of favourable seasonal trends and the prospect of a ‘goldilocks’ scenario, where the economy achieves a soft landing without significantly hampering economic growth while inflation cools back to target.
Often, financial commentators quote the ASX200 price index which excludes dividends. The effect of the dividends, which compared to global peers is relatively high in Australia is clear.
The catalyst for this upbeat market mood was the Federal Reserve’s recent decision to maintain interest rates between 5.25% and 5.50%. In the final meeting of 2023, Fed Chair Jerome Powell adopted a surprisingly dovish stance, exceeding market expectations. This shift was complemented by the Fed’s updated projections, indicating a more substantial reduction in rates for 2024 than previously thought, dropping from 5.1% to 4.6%. Financial markets have swiftly adjusted to these developments, with the likelihood of a rate cut as early as March 2024 now sitting at a strong 72%. This shift in expectations has led to lower yields across various maturities and a weakening of the US Dollar index.
Adding to this today is the latest Australian employment data, which showed 61.5k jobs were added in November, well above the 11k forecast. Meanwhile, the unemployment rate rose to 3.9% above the 3.8% estimated due to a increase in the participation rate. This is a welcome development, although following last week’s disappointing GDP data, investors also expected the RBA to ease in 2024, also providing support for local equities.
The combination of a dovish Federal Reserve, cooling inflation, and robust market performance points towards a brighter future for equities. Investors are now looking at a landscape where economic growth can be sustained as central banks are expected to ease in 2024 alongside the moderation of inflation, pointing to an optimistic outlook for the global economy and major stock markets.
