One of my financial planning clients rang me a couple of weeks ago worried about some US expert tipping that the US would fall into a debt spiral, worse than the Global Financial Crisis! As I talked my client out of his depressing fear, I was really glad when my predicted bounce-back of shares happened in earnest last week.
In case you missed it, optimism was ramped up because the Fed boss Jerome Powell not only indicated that rate rises are over in the US, but he also actually entertained reporters’ questions about rate cuts next year.
This morning, the AFR looked at the subject and came up with this: “Broker Barclays in a note led by economist Christian Keller now forecasts the FOMC to cut three times next year starting from June 2024, following its lower inflation forecast and chairman Jerome Powell’s “lack of push back on rate cut expectations’.”
However, the same newspaper looked at SPI futures and informed us that the local market was going to open 1% lower. But at the time of writing, the market was down only 0.14%. While I suspect we’ll see a bit of this kind of volatility, share markets should be on a rising trend.
Why? Well, rising interest rates from central banks KO’d growth and tech stocks, so that will be progressively reversed over 2024. I’ve been throwing in a better-than-expected China economic recovery, no US recession, a lower oil price and falling inflation, all on top of rate cuts as the key reasons why I wanted to be long growth stocks in the year ahead.
And then there’s the fourth year of a US President, which is the second best for stocks, historically-speaking.
I have been warning that I could go more defensive later in 2024, possibly doing a “sell in May and go away” play, especially if the surge in stocks starts to look irrational. Against that, I know markets are overdue for a couple of good years, as the chart below shows.
Remember, stock markets are supposed to rise on average 10% a year, with half the rise coming from capital gain and the other from dividends. For the last five years, the average gain has been closer to 8% rather than 10% and it has been dividends that have helped that average.
Over the past five years, 2020 was a small loss. 2021was a 13% gain, being a make-up year after Covid lockdowns and helped by record low interest rates. But then 2022 was a small 300 point loss. 2023 is only 7.3% higher year-to-date. And we’re only around 300 points higher since 21 February 2020, the day before the Coronavirus crash of the market happened.
We’re overdue for a big market year. One of the USA’s most respected economist thinks it won’t stop in 2024! Ed Yardeni previously served as Chief Investment Strategist of Oak Associates, Prudential Equity Group, and Deutsche Bank. He was also the Chief Economist of C.J. Lawrence Prudential Securities. Last week, this headline quite shocked market watchers:
“Ed Yardeni sees S&P 500 surging to 6,000 in 2025!”
This is how CNBC reported this story: “Widely-followed Wall Street strategist Ed Yardeni issued a head-turning bull call on the stock market, seeing the S&P 500 soaring all the way to 6,000 in 2025.”
Ed explained why, with this: “That’s because we are seeing more reasons to believe in our Roaring 2020s scenario — the theory that productivity growth, driven by technological solutions to the labour market’s supply/demand imbalance, will lead to strong economic growth throughout this decade.”
You have to hope that Ed is on the money. He could be if inflation keeps falling, the US dollar also falls, and we see rate cuts with no US recession.
Our market is actually due for a bigger rise than Wall Street, but we need to see the CPI fall nicely in coming months.
The big dates to watch are:
Jan 10: November monthly CPI
Jan 31: December monthly and quarterly CPI.
Finally, for those of you who are wondering why our market was expected to open 1% down, it was because a voting member of the Federal Reserve, John Williams, spooked a few people by telling us that markets are getting ahead of themselves expecting interest rate cuts any time soon.
This was to counter the exuberance that followed what Jerome Powell said last week. It’s called “jawboning”, which is central bank speak for putting the frighteners on the market to hose down the investor fires that might overheat the market.
The Fed doesn’t want to raise rates again in this cycle. If they need to use spook tactics to achieve this, they will. That said, these guys at the Fed look like they’ll pull off the big result of lower inflation, without a recession, which explains why people like me, and Ed Yardeni will be long stocks for 2024 and maybe 2025.
Of course, one of my big watches for next year will be working out how long this upswing in stocks is likely to last.
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