Quarterly Investment Review – Q4 2023
“The Middle East region is quieter today than it has been for two decades.” James Sullivan, US National Secretary Adviser, 29.9.2023
“The Western World faces the greatest number and most complex array of threats since the end of the Cold War.” General Petraeus, 21.10.23
“The stock market is a device for transferring money from the impatient to the patient.” Warren Buffett
2023 was a year in which investors were continually wrong footed. Surging inflation and sharply rising interest rates meant that the banking crisis in March caught them unawares, as bond prices plunged. The reassertion of higher rates as economic growth continued to be strong, despite interest rates reaching a twenty year high, caught them off guard again. In equity markets performance was dominated by a handful of immensely powerful US technology companies benefiting from an explosion of interest in Artificial Intelligence. Apart from these companies, the stock market’s performance was muted. By year end the performance of US 10-year bonds was flat ex the coupon payment, registering a third consecutive disappointing year. The S&P 500 was up 24.2%, though much of this rise was accounted for by the mega tech companies’ stellar performance. The equal weighted S&P index was up 11%.
After a forty-year bull market bonds have been struggling. When interest rates reached all-time lows, the temptation for any type of borrower to take on debt led to an orgy of debt issuance. Yet despite higher borrowing costs debt has continued to accumulate. In 2023 the US Government issued its second largest amount ever. Incredibly this borrowing occurred during a year of reasonable growth, which begs the question of what borrowing would reach if the economy fell into recession and required government support. The annual rate of US Government borrowing is now running at approximately $2 trillion, piling on top of a total of about $33 trillion. The annual interest bill is now close to $1 trillion per year and rising. The $2 trillion of new debt, together with $7.6 trillion that matures in 2024 that will need to be rolled over, is now incurring an interest rate of over 4%, compared to the current average of 2.78%. The market seems to be floundering as it digests these giant flows. The further complication is that large-scale buyers such as the wealthy Middle East oil nations and China have become less willing to buy American debt, leaving the market rate being set by more price sensitive investors such as fund managers.
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