This year, investors will need to pay attention to factors such as rate cuts, debt trends or stock market strength.
US risk assets had a terrible 2022 and a banner year in 2023. We don’t know what will happen in 2024, but there are some ideas about what the drivers for the markets might be. These ideas are summarized in five questions.
What will be the pace of interest rate cuts? The consensus is that it is very likely that there will be several such declines
US risk assets had a terrible 2022 and a banner year in 2023. We don’t know what will happen in 2024, but there are some ideas about what the drivers for the markets might be. These ideas are summarized in five questions.
What will be the pace of interest rate cuts? The general consensus is that several cuts in the Federal Reserve’s official interest rate are very likely. Stock markets consider this good news. But there are two forms of interest rate cuts: those caused by disinflation and those caused by economic slowdown. The latter are bad for stocks. The consensus is for six 25 basis point rate cuts driven by pure disinflation, rather than concerns about an economic slowdown or decline in growth. But let’s remember what the near-universal consensus was a year ago (that there would be a recession) and that it hasn’t come true. An interesting secondary question is whether fiscal and monetary policy will be particularly conducive to economic growth this year, given that most democratic countries will have elections soon. Many experts argue that politicians will do everything possible to ensure that citizens go to the polls happily. But interest rates remain high and there are governments determined to tighten fiscal policy. How much stimulus can you really give this year?
What will happen to long-term bond yields? It never ceases to amaze us how much the debate over 10-year Treasury yields revolves around short-term political expectations. But whatever happens to growth and inflation in 2024, there is debate over whether the 2% yields that prevailed between the financial crisis and the pandemic were a historical anomaly or a normal state to which we are rapidly returning. If short-term rates continue to fall and long-term rates remain around 4%, we will find ourselves in a new world.
What will happen to the ‘Magnificent Seven’? Let’s imagine that economic growth disappoints considerably this year and the bad shape of the rate cut occurs. What will happen to the stocks of the ‘Magnificent Seven’, i.e. the seven big technology companies? In recent years they have sometimes acted as growth stocks and other times as defensive stocks. The question is what tone they will adopt.
Is the alarming correlation between US bonds and stocks just a bad dream? The correlation between stocks and bonds has been positive for much of 2023, which is concerning. Correlation tends to move over periods of decades, generally following inflation expectations. When inflation is controlled, stock and bond returns typically offset each other (i.e., negative correlation). But when inflation is volatile and dangerous, as in 2022 and 2023, stocks and bonds fall and rise together, depending on changes in the inflation outlook. Inflation today seems much less threatening than before. And the correlation was once again negative. According to Citi’s Stuart Kaiser, the one-year rolling correlation is approaching zero. Maybe it was all a bad dream?
Will global stock markets continue to hold up? US stocks got all the attention in 2023, but there were winners in the rest of the world too. Investors were excited about Japan’s growth due to the push for corporate reform and an end to deflation. As a result, an unhedged investor in US dollars would have earned 19% if he invested in Topix in 2023. Emerging markets, excluding China, also had a very good year (total dollar return: 20%) thanks to the rally of the Indian dollar. stock markets as many central banks in emerging countries have held up well to the tightening of the Fed’s monetary policy. Even in Europe, despite the negative effects of stagnating German and Dutch growth and underlying inflation, stocks have done very well ( total dollar return of 20%). What is noteworthy about all this is that these markets have achieved results close to those of the United States, but without the impressive US economic growth. Are these results sustainable? And if world markets falter, can US stock markets continue to rise?
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2024-01-08 00:16:31
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