Weekly Buzz: How the markets beat expectations in 2023

The global economy proved its worth last year, with stocks and bonds defying expectations to finish on a high note. What drove this resilience?

A look back, before a look forward

Economists weren’t especially hopeful about 2023, with expectations of a recession abounding. After all, hampered supply chains were driving inflation higher, and central banks were fighting back with economy-bruising interest rate hikes.

By most accounts, stocks should’ve ended up in the dumps. Yet, US and European stock indexes have closed out the year around their all-time highs, while Japanese equities are at their highest in decades.

Mind you, it’s not just stocks that made investors breathe a sigh of relief: US corporate bonds and gold pulled in returns of around 10% each, and Bitcoin’s up some 150%.

Behind the economy’s resilience

So the world economy has held its own – so far, at least. That’s mainly thanks to a few key factors: the strength of the US labour market, US consumers leaning on their pandemic savings, companies locking in long-term loans during the pandemic, and governments sparing no expense for stimulus packages.

Improving supply chain conditions, cheaper commodities, and a weakening housing market have helped push inflation down toward the US Federal Reserve’s 2% target too. Stocks held steadier than expected, while the AI frenzy did major favours for US tech stocks.

And now with inflation finally headed toward central banks’ targets, they can start holding rates where they are – or even start bringing them back down. This potential end to interest rate hikes has also added to the spring in the market’s step.

But that doesn’t quite paint the full picture: interest rates are way above their ultra-low levels from a couple of years ago, and yet stocks are near their peaks.

The difference, then, may be down to savvy cost management (our Jargon Buster below breaks this down). Prudent firms could also be passing on higher costs onto customers to protect their bottom line, which can make their stocks look like decent bets even in trying times.

As an investor, what does this mean for me?

Investors banked on stocks rocketing in 2022, and crashing in 2023. Both times, they were wrong. There’s a lesson worth learning here: trying to predict the market is tough, and focusing too closely on the near-term market consensus probably isn’t the best bet for long-term investing success.

Instead, invest with a long-term view, towards your own financial goals. If you believe that economies will develop over time – which they tend to do as populations grow and productivity improves – then you’d also expect company profits to grow over time. Staying invested in the market with a well-diversified portfolio that fits your risk profile (consider either one of our General Investing portfolios) is hard to beat.

This article was written in collaboration with Finimize.

🎓 Jargon Buster: Cost management

Cost management is all about how companies control expenses to maximise profits – managing every penny, from the cost of materials to employee salaries. And there are plenty of ways to control costs, from finding more efficient methods, to negotiating better deals with suppliers.

The goal here: boosting financial health and increasing profits, without sacrificing the quality of products or services – it's a balancing act between spending wisely and investing smartly.

✨ Our Macro Outlook for 2024 

As the market consensus shifts from expectations of recession to the narrative of a “soft landing”, our CIO Stephanie Leung shares our view on its likelihood - along with growth, inflation and all things returns for next year.  A 10 minute read is all you need to stay informed.