Confidence or Caution?: ASX Had One of Its Best Januaries Ever!

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Investors worldwide have been greeted with a promising start to 2023, as share markets have seen a dramatic price surge. 

The Nasdaq is up 11%, with some of the most speculative equities going skyward, while the ASX 200 is up 6% for January, one of its strongest Januaries ever. Moreover, Tesla has increased by almost 60% over the last five weeks.

The rally has been robust at cyclical and speculative stocks, indicating that investors feel increasingly confident about the global economies’ future. 

Investors have also taken heart from news that some of the worst-hit countries during 2020 and 2021 are beginning to show signs of recovery. With this favourable sentiment, many experts believe this could be just the beginning of a long bull market cycle.

The equity and bond markets seem to be forecasting that inflation will continue to retreat from its highs back towards the Fed’s 2% target by 2024, central banks will cut interest rates ~1.5-2% over the next 18-24 months, and company earnings will continue to grow unabated. This is further supported by recent reports that inflationary pressures are easing, and central bank policies are becoming more accommodative.

This paints a picture of optimism for investors, as the seemingly rosy economic outlook could mean strong returns ahead. Some analysts have gone as far as to say that this may be one of our lifetime’s longest and strongest bull market cycles. 

However, many investors remain cautious. With the positive outlook for global economies comes increased risk and volatility. As such, investors must be mindful when entering the markets, maintaining a disciplined approach to investing to maximise returns while minimising potential losses. 

Inflation remains high even though it shows the possibility of coming down. For instance, Australia took ten years to abolish high inflation in the 1970s, and even though we have learned from that experience, many other nations have since struggled to do the same.

Westpac chief economist Bill Evans said, “We expect headline inflation in 2023 to slow to 3.7 per cent – well below the Reserve Bank’s current forecast of 4.7 per cent.” 

Additionally, over half of all fixed-rate mortgages expire in CY23, and mortgage rates for this category will rise from about 2% to 5.5–6.0% during the year. These households’ discretionary income will be significantly impacted, influencing business earnings.

There are several reasons to stay cautious, including the ASX’s proximity to record highs, inflation at almost 8%, rising interest rates of over 3%, and central banks’ ongoing withdrawal of money from the markets.

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