Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

In a quiet run-in to the end of the year, there has been little to distract investors’ attention away from the central bank end-of-year show. Markets heard what they wanted to last week and investors are heading into the holiday season in a festive mood.

Happy holidays

Jerome Powell has donned his Father Christmas outfit this year and delivered the broadest of hints to investors that the rate-hiking cycle is finished and that next year will deliver the cuts in the cost of borrowing that markets have already started to price in.

The Fed’s so-called dot plots, which show where individual rate setters see interest rates over the next few years, are now indicating three quarter-point rate cuts in 2024. The market expects even more. Alongside persistently low unemployment, improving inflation numbers and ongoing job creation, it’s been a powerful seasonal cocktail for investors. Shares and bonds have both soared.

The S&P500 index is now within a whisker of the high point it reached nearly two years ago having reversed the summer correction in a matter of weeks. But it’s been a long round trip from the January 2022 peak and that argues that the market still has momentum as we head into the New Year.

Bonds, too, have quickly recouped some of the losses they have incurred during the unprecedented period of rising interest rates over the past two years. The yield on 10-year Treasury bonds has fallen from over 5% in October to under 4% today. Bond prices move inversely to yields, so that’s provided fixed income investors with some welcome respite after a difficult three years.

In other markets, gold and bitcoin have joined the interest rate party. In both cases, lower yields on bonds and cash increase the attraction of assets that do not pay an income themselves. Gold is close to an all-time high above $2,000 an ounce. Bitcoin, which has been on the move all year, is half-way back to its all-time high of $69,000, having dipped as low as $16,000 at one point.

Where next in 2024?

So, as 2023 comes to a positive close, the big question is how long the rally can last next year. The longevity of the correction is a positive. The market tends to move in steps, with upward moves punctuated by sometimes lengthy periods of consolidation, such as the one we have experienced over the last two years.

But to keep moving higher, shares will have to overcome a few headwinds. The economy is slowing as the impact of higher rates begins to bite. Earnings forecasts are optimistic, and that opens up the scope for disappointment next year. And, finally, valuations are punchy. At 21 times expected earnings, the US market is no longer as cheap as it was starting to look a couple of months ago.

The big driver of markets, however, will be what happens to interest rates next year. And the trajectory may well not be the same everywhere. On the basis of last week’s central bank comments, the US looks likely to ease the most. The Bank of England faces a more persistent inflation problem. And the ECB looks to be in no hurry to cut. If nothing else, US holidays might be a bit cheaper next summer if the interest rate differential feeds through into the exchange rate.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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