Insight Investment

Rate expectations have changed dramatically and, although markets appear to have got ahead of themselves, inflation is moderating, and growth has slowed, which supports the view that the hiking cycle is over.

If the Fed’s July 2023 rate hake was the last in this cycle, then the asset class returns in the intervening period have been poor by historic standards (see Figure 1 and 2), although the end of 2023 saw a significant upswing. The pace of rate cuts currently priced into markets leaves open the possibility of periodic bouts of volatility as rate expectations re-adjust to a more realistic path, but history does suggest that equity and fixed income markets may continue to make gains into 2024. At some stage, we expect the equity/bond relationship will become less correlated, thereby providing more of a source of diversification in cross-asset portfolios, but this may take time to reassert itself.

Figure 1: Historical performance of US equities after interest rates peak

Source: Insight and Bloomberg. Data as at 29 December 2023

Figure 2: Historical performance of US Treasuries after interest rates peak

Source: Insight and Bloomberg. Data as at 29 December 2023