IN FOCUS6-8 min read

Q4 review: markets rally as expectations of rate cuts nears

As inflation figures look brighter, markets respond positively to the prospect of a soft landing.

Snowboarder prepares for soft landing


Josh Barber
Investment Manager

We entered the final quarter of the year off the back of two months of poor returns for both global equities and bonds, driven by the “higher for longer” narrative surrounding central bank rate setting expectations. Rate setters across developed markets had expressed fears core inflation may remain “sticky” and indicated they would not relent in their efforts to bring inflation back to the 2% target.

These fears may well have grown after the October 7 attack by Hamas on Israel, which saw oil prices spike back up towards their highs for the year. Investors moved into safe haven assets in response, and this was manifested through a +7.3% rise in gold prices. By late October, the yield on the US 10-year Treasury bond had gone above 5% intraday for the first time since 2007, reflecting the markets view on where rates were headed, in further bad news for fixed income.  

Equities were also under pressure, and by the end of October, the S&P 500 had seen three consecutive monthly declines for the first time since the first months of the COVID pandemic beginning in March 2020. US and European economic activity, as shown by purchasing managers data, was continuing to suggest a contraction, fuelling speculation of recession in both regions, and this was emphasised as Eurozone GDP data, released in October, showed a contraction in the third quarter. 

A plot twist 

However, the narrative unexpectedly changed in November after we saw a welcome downside surprise for October’s inflation rate in the US, alongside strong economic growth for Q3, leading the market to price in the greater likelihood of a soft landing. This was subsequently supported by more dovish comments from members of the Federal Reserve’s (Fed) Open Market Committee (FOMC) in November. This was then followed by the release of the FOMC minutes from the November meeting on December 13, including the ‘dot plot’ chart, showing members projections for rates over the next couple of years, which now showed 75 basis points worth of cuts in 2024 compared to 50 basis points at the September meeting. Jerome Powell, the Chair of the Fed, then held a press conference in which he came as close to promising early rate cuts as a central bank could ever do without outright confirming it, by suggesting that the central bank were aware of the risk of keeping rates at restrictive levels for too long. Markets moved to price earlier, and more aggressive rate cuts, with fed funds futures fully pricing in a 25 basis points cut by March. 


A surprise comeback for underdogs and unloved stocks  

All that led to a strong market rally, with November marking the best month for Bloomberg’s global bond aggregate, a proxy for global bonds, since the height of the Global Financial Crisis in December 2008, with a return of 5%. That was then followed up in December by a 4.2% gain, meaning the index finished the year up just under 6% in total return terms. It was also very positive for global equities, with the MSCI All Country World Index up 9% in November and 4.8% in December, leaving the index up 22.8% for the calendar year in USD terms (Up 15.9% in GBP). 

With the majority of the returns that equities had posted up until the end of October attributed to the Magnificent Seven – a group of seven US tech related stocks that have been driving the early stages of the AI revolution – we then saw a broadening out of the market in the final months of the year, with stocks outside these mega cap names performing better or “catching up”. This can be demonstrated by comparing the S&P 500 index vs the equally weighted S&P 500 index, where each constituent has the same weight as one another. The equal weighted S&P 500 index returned over 2.5% more than the market cap weighted index in the final two months of the year.  

Previously unloved areas of the market, such as small caps stocks, saw an even larger rally, with the Russell 2000, an index of US smaller companies, rising 8.8% in November and 12% in December, to leave it up 15.1% for the year, having been down more than 7% in late October. Emerging markets was another, down 3% at the end of October, the region rallied 11.5% through November and December to finish up more than 10% for the year. Although Chinese equities, the largest component of the emerging market index, after a brief rally in November, continued the downward trend they had experienced all year to finish down 11% in 2023. Concern surrounding the property sector in China continues to weigh on sentiment and consumers’ confidence is at record lows.  

Activity during the quarter 

In light of the increasingly positive sentiment surrounding a soft landing in the US, we added to equities in November, via the S&P 500 ETF, for our growth and equity focus models, decreasing the magnitude of our underweight position in the US. This is supported by the stronger-than-expected US consumer spending we’ve seen that has reduced the likelihood of a recession in the near term, whilst progress with disinflation has been promising, meaning a smaller underweight is appropriate. Our current positioning is a small underweight equities overall compared to our strategic asset allocation. 

We slightly reduced the duration of our government bond allocation in models, taking advantage of the recent rally in longer duration bonds by introducing a holding in the passive HSBC Global Government bond fund. This trade also helped diversify our exposure across global government bonds, away from the UK, lowering our risk given concerns around future Gilt issuance and higher inflation levels in the UK potentially seeing rates remain higher than in the US and Europe.  


All data is from LSEG Datastream, Total Return in USD unless otherwise stated.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


Josh Barber
Investment Manager


The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.