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Monthly Market Review - January 2024

Published on
February 19, 2024

Wealth Digest: Monthly Market Review (January)

Global markets took a pause in January after a very strong finish witnessed to 2023, especially in Nov-Dec of last year. While markets initially witnessed some profit taking as signs of an early Fed-rate cut faded, they generally recovered by the end of the month. Economic trajectory and Fed policy remained unclear, while the biggest story for the month was the trade disruptions induced by heightened tensions in the Red Sea. The MSCI World Islamic Index inched lower, ending January down 0.35%. Similarly, the Dow Jones Sukuk Index opened the year slightly down by 0.4%.

In the first 2024 monetary policy meeting, the Fed maintained a neutral tone ruling out any further rate hikes while maintaining the previously signaled possibility of rate cuts in the near future. However, despite optimism about the economy and easing inflation, Chairman Powell rejected the possibility of a rate cut as early as their next meeting in March and emphasized data dependence, slowing down any decision-making 'rush.' The Fed’s dot plot which summarizes their outlook, projects three 2024 rate cuts and seven more through 2026. Bond markets, cautious given the Fed's tone, nudged US 10-year Treasury yields up from 3.86% to 3.96% by month-end.

In the broader U.S. economy, the prospect of a 'Goldilock Period' continued to gain momentum. The labor market maintained full employment, with the December unemployment rate holding steady at 3.7%. The economy sustained robust growth with a surprising 3.3% GDP surge for Q4 2023, bringing full year growth to 2.5%. December retail sales soared by 5.6% YoY, marking the strongest increase since January 2023, and signaling a resilient consumer base. And although December's headline inflation ticked up to 3.4% YoY from November's 3.1% YoY, the overall trend is downward, with core CPI dipping to 3.9% from the previous month's 4.0%.

Across the pond, a somber economic outlook unfolded with signs of a decelerating economy. UK retail sales contracted 2.4% in December, while Eurozone sales declined 1.1% in November. Reduced economic activity and muted manufacturing perpetuated deflationary pressures on producer prices, reflected in a 2.8% decline in UK PPI. Similarly, the HCOB Eurozone Composite PMI (a popular index to track economic output) registered a preliminary reading of 47.9 in January, signaling an 8th consecutive monthly reduction in business activity. Inflation figures showed little change as core CPI for the UK remained steady at 5.1% down from a high of 7.1% earlier in May 2023, while core CPI for the eurozone continued its downward trend to 3.4% in December. In line with their American counterparts, both the ECB and BoE maintained rates in January, reaffirming their commitment to keeping rates at restrictive levels until inflation exhibits a sustainable trend toward their long-term targets.

China’s economic recovery exhibited mixed signals. Retail sales continued to rebound and were up 7.4% in December, while industrial output grew 6.8% YoY in December, the sharpest increase since February 2022. However, deflationary pressures still loom large as December CPI readings recorded a YoY decrease of 0.3% in consumer prices while PPI readings saw a decline of 2.7% YoY. Unemployment rate up ticked slightly to 5.1%. Chinese equity markets have slumped to multi year lows as confidence in the economy has evaporated amongst signs of sputtering growth and a deepening real estate malaise.

Looking ahead, the tension between the Fed and the markets will continue to drive the narrative for 2024. The Fed for its part has cautioned that the actual path would remain dependent on how the economy evolves. Markets, however, expect the Fed to cut 5-6 times in 2024. This may lead to some profit taking and presents the risk of further turbulence if market expectations are not met. Investors should seek to remain invested through a well-diversified portfolio that can help them weather such short and medium term shocks.

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