Mercer market review 

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Our investment specialists present their latest thinking to keep you informed of developments and opportunities

Markets can move rapidly and conditions can change based on macro- and micro-economic news and data. At times, it can be difficult to keep up and to determine the important information from the noise.

Our global investments analysts and researchers, and market and asset class specialists, are constantly monitoring markets to identify the most important developments and potential opportunities. 

Our monthly and quarterly insights reports provide a summary of what we believe to be the most significant news points and market movements and attempt to explain them, aiming to keep you on track and informed while still allowing you to keep a focus on the long term.

Monthly Capital Market Monitor – Markets start the year with cautious optimism

2024 started the year with positive global equity and negative global fixed income returns. In January, US equities outperformed international developed and emerging market equities. Growth outperformed value as the prospects of the AI roll-out remained an important narrative. Positive US equity returns were helped by continued economic resilience. US GDP growth was higher-than-expected for 2023Q4. An additional tailwind was the prospect of Fed rate cuts in 2024 as inflation is expected to continue its downward trajectory this year. It is worth noting that the S&P 500 hit a new all-time high, fully recovering from its 2022 drawdown. Yields on the longer end of the curve shifted higher, causing losses for fixed income. Both investment grade and high yield spreads remain near 52-week lows. Outside of the US, major central banks remained on hold and maintained cautious rhetoric. China continues to incrementally support its economy, as economic data remains weak. Its stock market was one of the worst performers this month.

The forward-looking composite purchasing manager indexes (PMI) remained in expansionary territory in much of the developed world, although the Eurozone continued to remain in contractionary territory. Preliminary estimates showed a notable spike in US PMI as manufacturing returned to expansionary territory and the service PMI hit a 7-month high. Growth continues to be led by the service sector in developed markets. Consumer confidence in the US reached its highest level since July 2021 as consumers’ inflation expectations for the year ahead further decreased. While China’s PMI remains in expansionary territory, fears surrounding its largest real estate developer, Evergrande, intensified as a court ruled it must be liquidated.

US headline inflation increased to 3.4% year-over-year, higher than market expectations of 3.2%. Core inflation decreased to 3.9% but also came in above market expectations. Inflation in the UK and Eurozone increased after reaching two-year lows in the previous month. Inflation in Japan fell to its lowest print since July 2022. China continued experiencing deflation for the third consecutive month, the longest stretch since 2009. Major central banks kept interest rates unchanged. In the US, market expectations for rate cuts in March have evaporated, although the market continues to price more rate cuts for 2024 than what the Fed previously signalled. Outside of the US, major central banks reaffirmed their cautious stance.

On the geopolitical front, the conflicts in the Middle East continued to escalate. The market impact from these events was limited. Oil rose 8% from a low base, but that appeared to be driven by supply disruption due to US winter weather and investors anticipating more economic resilience than expected.

The US dollar strengthened against most major developed and emerging market currencies in January. Gold declined during the month as real yields trended up. REITs underperformed broader equities due to their higher interest rate sensitivity. Commodities and natural resources equities had a weak start to the year despite oil prices increasing.

Mercer's Monthly Market Monitor provides an overview of global financial markets.

In this issue we cover:
  • Markets start the year with cautious optimism
  • Global equities – strong US, weak elsewhere
  • Fixed income – rising yields lead to negative returns
  • Hedge funds and commodities mostly flat, dollar strong

Quarterly Market Environment Report Q4 2023

Global equity markets performed strongly during the fourth quarter, largely driven by a sharp decrease in longer-term rates following the Fed’s more dovish than expected statement in December. This led the market to price in significant rate cuts in 2024. Volatility remained subdued and declined during the quarter as asset classes rallied across the board.

Treasury yields fell during the quarter and the yield curve remained flat to slightly inverted. The 2-year Treasury yield fell 80 bps from 5.0% to 4.2% during Q4, while the 30-year Treasury yield fell 68 bps from 4.7% to 4.0%. Credit spreads also declined during the risk-on quarter, most notably for high yield bonds.

The Bloomberg US Aggregate Bond Index returned 6.8% in Q4, while the MSCI ACWI returned 11.0%. As a result, a traditional 60/40* portfolio returned 9.4%. For 2023, a 60/40* portfolio returned 15.4%.

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