Stock markets defied expectations by making a strong start to 2023 with gains across global equities. Cooling inflation rates dampened fears of further aggressive interest rate hikes, boosting risk sentiment.
With inflated energy prices on their way back down to earth, inflation has begun to cool in major countries—having peaked around the middle of last year. As inflation falls and economies experience better-than-expected growth, investor sentiment is on the up.
After declining over 32% last year, the Nasdaq Composite rebounded by 10.7% in the first month of 2023, marking its best January performance since 2001. By the end of the month, the S&P 500 advanced 6.3%, the Dow gained 2.9% and the Russell 2000 rose 9.7%.
Travel stocks were amongst the month’s strongest gainers, alongside tech, auto, media and entertainment.
The U.S., in particular, saw significant equity gains. Inflation slowed for the 6th month in a row, suggesting that U.S. inflation has finally reached its peak. A mild recession is on the horizon, according to experts—but as is a strong growth rebound.
Shares in the eurozone were among the best regional performers last month. Inflation rates are on their way down, but further interest rate hikes will be needed to return to the Eurozone’s 2% inflation target.
The Bank of England recently raised the UK base rate to 4%, marking the tenth consecutive increase since December 2021. It hinted that inflation may have finally reached its peak, and experts are anticipating a “shallower” recession than expected. Strong share price performances have been seen in recent months, particularly across the retail, travel & leisure, and housebuilding sectors.
An outlook for 2023
The global economy is projected to expand by around 2.9% in 2023, before rising to 3.1% the following year. Global consumer price index (CPI) inflation is expected to slow to 3.5% early this year, after reaching 10% in the second half of last year.
With this, experts are predicting fewer interest rate hikes by central banks. So far in 2023, this has boosted investor sentiment and led to a strong start for global markets.
Every year since 1929, an increase in stock prices in January has led to positive full-year returns around 80% of the time. After a volatile 2022, January’s gains are a positive sign for investors.
Several major economies are facing a recession. However, experts are now agreeing that recessions in the U.S. and Europe will be mild. Whether stock values retract or continue to build in the coming months, it is important that people continue to keep the long game in mind when it comes to investing.
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