Equity markets have performed very well this year despite the challenging macroeconomic and geopolitical environment. With the exception of a brief correction in April, equities have shown a strong upward trend. This strong positive performance has been particularly pronounced in the US, where the major indices are breaking records on an almost daily basis. The S&P 500 has surpassed the 5,500 mark and is up 15.6% so far in 2024. The Nasdaq Composite is close to the 18,000 mark and is already up 21%, while the Dow Jones Industrial Average has crossed the important 40,000 mark but is only up 3.8% in 2024. Last year's trend also continued with the stellar performance of the Magnificent 7, which have been key contributors to the positive performance of the broader market and other technology stocks, as demand for AI shows no sign of slowing. Figure 1 compares the performance of the Magnificent 7 with the major US indices. Since June 2023, the Magnificent 7 have gained almost 60% compared to 35% for the Nasdaq, 30% for the S&P 500 and 20% for the DJIA.
Inflation remains a key contributor to global risks, particularly in the US. Since June 2023, inflation has fallen below 4%. While this initially looked promising, inflation has never fallen below 3% and remains sticky. As a result, most market participants expected the Fed to cut rates several times during 2024. Recent developments have changed these expectations dramatically. At its most recent meeting, there was a significant chance that the Fed would even raise rates again. At its meeting in early May 2024, the Fed is holding its rate between 5.25% and 5.5%. While rate hikes are less likely in the near term than before the May meeting, some economists do not see a cut before 2025. Whether interest rates are lowered is increasingly dependent on the US labour market. With its current strength, the economy can tolerate higher interest rates. If the labour market shows signs of trouble, cuts are likely to come sooner than expected. While inflation will remain a key criterion for such a decision, the focus seems to have shifted to the labour market. Figure 1 shows the development of inflation and interest rates in the US, the EU, the UK, and Switzerland.
In the EU, inflation has been on a healthier decline. Inflation in the EU has fallen to 2.6% in March 2024, the lowest level since the start of the inflation spike. Interest rate cuts now seem much more likely in Europe than in the US. Even in the UK, inflation is coming down to manageable levels and the BoE has hinted at earlier cuts than previously thought. Switzerland, which has been unique during soaring inflation, was even able to already to lower its interest rate from 1.75% to 1.5% in March 2024.
Cryptocurrencies started phenomenally in the year 2024. To date, Bitcoin (BTC) is up almost 50% in 2024 after soaring around 160% in 2023 already. On 28th February 2024, BTC managed to surpass the $60k mark and peaked at nearly $64k. With the Halving on the horizon, BTC will likely surpass its previous record high of $68k set in November 2021. Ethereum (ETH) and other altcoins are following the price development of BTC after the most recent hype around the BTC ETF approval showed a relatively small impact on other coins. ETH is also up almost 50% in 2024, at the time of writing. ETH is currently trading at $3,385, levels last seen in early 2022. While BTC is already relatively close to its record high from 2021, ETH is still quite far away from its record high of $4.8k from November 2021. The growth of Solana (SOL) has slowed in 2024, gaining only 16%. Nonetheless, the current level of $118 was last seen in early 2022, when the token crashed substantially amid the general crypto crash and reliability issues of the network. Although the growth over the past two months has not been exceptional, this is more than compensated by the 10x return in 2023. While BTC and ETH show a tendency for a new record level soon, SOL still needs to grow substantially to overtake its previous record high of $260 in November 2021. Figure 1 shows the price development of the three coins from the end of 2021 to February 2024. The most recent surge in prices also resulted in the market capitalization of cryptocurrencies rising above $2tn for the first time since early 2022. Currently, the market cap of the industry lies at $2.33tn.
Cryptocurrencies started phenomenally in the year 2024. To date, Bitcoin (BTC) is up almost 50% in 2024 after soaring around 160% in 2023 already. On 28th February 2024, BTC managed to surpass the $60k mark and peaked at nearly $64k. With the Halving on the horizon, BTC will likely surpass its previous record high of $68k set in November 2021. Ethereum (ETH) and other altcoins are following the price development of BTC after the most recent hype around the BTC ETF approval showed a relatively small impact on other coins. ETH is also up almost 50% in 2024, at the time of writing. ETH is currently trading at $3,385, levels last seen in early 2022. While BTC is already relatively close to its record high from 2021, ETH is still quite far away from its record high of $4.8k from November 2021. The growth of Solana (SOL) has slowed in 2024, gaining only 16%. Nonetheless, the current level of $118 was last seen in early 2022, when the token crashed substantially amid the general crypto crash and reliability issues of the network. Although the growth over the past two months has not been exceptional, this is more than compensated by the 10x return in 2023. While BTC and ETH show a tendency for a new record level soon, SOL still needs to grow substantially to overtake its previous record high of $260 in November 2021. Figure 1 shows the price development of the three coins from the end of 2021 to February 2024. The most recent surge in prices also resulted in the market capitalization of cryptocurrencies rising above $2tn for the first time since early 2022. Currently, the market cap of the industry lies at $2.33tn.
2023 followed the core theme of 2022 with a key focus on inflation and interest rates. At the beginning of 2023, inflation was a huge concern, due to its high level. In the US, inflation was at 6.5% and already declined substantially from its peak in June 2022 at 9.1%. This trend continued in 2023 until it reached its bottom in June 2023 at 3%. Since then, US inflation remained steady between 3% and 4%. The EU and the UK saw a very similar development of inflation throughout 2022. Their respective inflation started at around 5.5% in January 2022 and rose to 10.5% by the end of 2022. As soon as 2023 started, inflation in the EU started to decline and eventually declined to as low as 3.1% in November 2023. Despite this promising development, inflation began to increase again to 3.4% in December 2023. While the UK’s inflation development was almost equivalent to the EU’s in 2022, this changed in 2023. Inflation in the UK remained above 10% until April 2023, at which point inflation was at 10% or higher for almost an entire year. Nonetheless, UK inflation also came down later in 2023 and reached the 4% mark at the end of December 2023. Based on the overall relatively similar development of inflation around the world, it is likely that inflation will stay at elevated levels in the short term. Another key reason for relatively stale inflation is that central banks stopped hiking their interest rate for a while now in 2023. Figure 1 summarizes the development of inflation in the US, EU, and the UK.
With the soaring inflation in 2021 and afterward, central banks had to react. Financial markets enjoyed rates close to zero, if not negative, for a long time. As a response, central banks started raising their interest rates. The Bank of England was the first to raise its interest rates in December 2021. The Fed followed in March 2022 and hiked its rate in every meeting and by a higher amount on average than the BoE or the ECB. The BoE did so too, but did smaller hikes on average. The ECB followed in June 2022, but they did not hike at every meeting. At the start of 2023, the interest rate in the US was already at 4.25% compared to 3.5% in the UK and 2.5% in the EU. Consequentially, the ECB hiked more in 2023 but did not reach the same heights as in the US or UK, which are currently at 5.25%, while the ECB’s interest rate remains at 4.5%. With interest rates now higher than inflation rates in each of those economies, most market participants expect interest rate cuts in 2024, especially due to an elevated possibility of a recession ahead. |
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