Market review

Global share markets, as measured by the MSCI World ex-Australia  Index (Net Dividends Re-invested) unhedged, had a very strong return of 14.1% over the March 2024 quarter. Rolling 12-month returns have also been particularly  strong, returning 28.7%. Most of the countries that make up the Developed Markets Index had a positive return for the quarter.

In the US, the stock market delivered large gains, with the S&P 500 Index rising by 10.4% over the quarter. Index performance benefited from an improved outlook for corporate earnings, especially from the leading ‘tech giants’. Economic data released during the quarter affirmed the resilience of the US economy, with an upward revision in the annualised  GDP growth rate for the December 2023 quarter.

We also saw positive returns in Australia, though they weren’t quite as strong as the US. Measured by the S&P/ASX 300 Index, the Australian share market increased by 5.4% over the March 2024 quarter. The Information Technology sector was the standout performer, surging by 23.6%. Only the Materials sector experienced a decline, dropping by 6.3%.

The rate of inflation in Australia moderated to 4.1% over the year to December 2023. This is a significant drop from the high of 7.8% we saw a year earlier, but it’s still much higher than the Reserve Bank of Australia’s (RBA) target inflation rate of 2-3%. Australia’s economic growth was a modest 0.2% for the quarter to December 2023. Given these results, the Reserve Bank of Australia (RBA) maintained  a cautious approach to future interest rate reductions at its March meeting.

Looking ahead

The surprisingly strong performance of the US economy was on show again during the quarter. As evidenced by a continuation of strong results for economic activity, employment, and inflation related data. It seems that the fear of recession in the US has now evaporated  and share prices continue to rise. It appears that interest rates have well and truly peaked. Investors seem to have a high level of optimism for the future of AI, which has added fuel to the share market rally. It’s looking likely that the US Federal Reserve (the Fed) will start to lower interest rates at some point this year. Bond markets have adjusted to the current market environment and are priced with the expectation of around three rate cuts in the US this year. It seems nothing can stop the bull market.

The positive turn in share market sentiment over the last six months has been stark and as a result, financial  markets have been whiplashed. Many investors missed the share market rally and are now scratching  their heads, trying to work out why the economy remains so strong given all the interest rate rises we’ve seen over the last couple of years. Is it that the full impact of these interest rate rises is yet to be seen? Or is it a result of all the support measures put in place during the pandemic? It seems the old rules of economics have not applied this time around. At least not yet anyway.

The flipside here is that interest rates may need to stay high for much longer. While the Fed, and other central banks, may cut rates soon, they will be restricted in how much they can do. Inflation remains too high for significant  interest rate cuts any time soon. Those holding out for lower interest rates may be disappointed, consumers and businesses will need to adjust. It might mean that we have entered a new market regime where interest rates need to remain structurally higher than what we experienced recently. The era of low interest rates that we all enjoyed was never going to last forever. And with markets showing so much optimism now accounted for in market pricing there’s a high risk of disappointment for individuals and businesses who are looking forward to lower rates.