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ASX 200 Santa rally: What’s driving 2023’s surprising surge?

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As we're getting into the festive swing of things, it's not just the Christmas lights that are shining bright.

The ASX 200 is enjoying its own kind of celebration, with a Santa Rally – a term describing the typical rise in stock prices in December – making headlines.

But what's really behind this impressive surge as we head towards Christmas 2023?

The 2023 surge: By the numbers

As of mid-December, the ASX 200 has shown an impressive increase.

Let's talk numbers: the S&P/ASX 200 Index (ASX: XJO) is making waves, up a solid 2.93% in the past 5 days.

Note: The S&P/ASX200 is a list (also known as an index) of Australia's biggest 200 companies on the Australian Securities Exchange (ASX), including CommBank, CSL and BHP, to name a few. Other countries have similar indices, such as the S&P/500, which consists of the biggest 500 public companies in the US, like Facebook, Google and Microsoft.

But it's not just the broader index basking in the limelight.

ASX tech shares are leading the charge, with the S&P/ASX All Technology Index (ASX: XTX), an index of around 50 top Australian tech stocks, climbing 3.89% within the same period.

Meanwhile, real estate and mining are the standout sectors, with real estate leaping by 3.9%, heavyweight mining stocks such as BHP rising by 3.6% and Fortescue hitting a 6.5% increase (over the past 5 days).

The catalyst: US Fed's interest rate decision

This surge in investor enthusiasm comes hot on the heels of the US Federal Reserve (the Fed) Chairman Jerome Powell's decision to maintain interest rates.

Marking the third consecutive meeting without a rate change, the Fed has kept the benchmark US interest rate steady between 5.25% and 5.50%.

How does the interest rate decision affect shares

The decision by the US Federal Reserve to keep interest rates steady has several implications for ASX shares and investors:

  • Boosts market confidence. Steady US interest rates often signal stability in the global financial environment, which can increase investor confidence. This confidence can extend to Australian markets, positively affecting ASX shares.
  • Encourages investment in equities. With interest rates remaining steady, the yields on fixed-income investments (like bonds) stay relatively low. This situation can make equities, including ASX shares, more attractive to investors seeking higher returns.
  • Enhances global economic outlook. A stable US interest rate environment can indicate a positive outlook on the US economy, which is a major driver of global economic activity. A robust US economy can lead to improved global trade conditions, benefiting Australian companies and, by extension, ASX shares.
  • Reduces currency volatility. Stability in US interest rates can lead to reduced volatility in major currencies, including the Australian dollar. This can have a positive impact on Australian companies with significant international exposure, thereby benefiting their stock prices on the ASX.
  • Attracts foreign investment. Steady or lower interest rates in the US can lead international investors to seek higher returns in other markets. The ASX can benefit from this influx of foreign investment, potentially driving up share prices.

The US markets are mirroring this positive sentiment.

Both the S&P 500 (up by 2.74% in the past 5 days) and the tech-heavy Nasdaq Composite (up by 3.3% in the past 5 days) showed significant gains.

On the other hand, the Dow Jones Industrial Average hit a new all-time high, surpassing its previous record set in January last year.

With a 14% rise since late October, the Dow's performance is a testament to the global market's reaction to steady monetary policies.

This unanimous decision is not just a boost for the US markets; it's resonating loud and clear here in Australia too.

Eric Beiley, Executive Managing Director of Wealth Management at Steward Partners Global Advisory, highlighted this impact in comments to Bloomberg:

"Beaten up stocks that are tied to the health of the economy have come back to life, with investors growing even more confident that the peak interest-rate cycle is over," he said.

"Stocks that have been hit by high rates are starting to recover. If anything, rates are likely headed lower next year, which is supportive for stocks."

What does this mean for Aussie investors?

For Aussie investors, this global financial dance offers both an opportunity and a reminder. While the ASX 200's rally is a reason to smile, it's crucial to remember that what goes up can also come down.

So, while enjoying the rally, keep an eye on the bigger picture and your long-term investment strategy.

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Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involve substantial risk of loss and therefore are not appropriate for all investors. Past performance is not an indication of future results. Consider your own circumstances and obtain your own advice before making any trades.

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