The fantastic bounce back of stocks on Wall Street on Friday (after Thursday’s spooking of the market by Fed chairman Jerome Powell) was a good omen for the path of stocks in coming months. What it showed was that provided economic data doesn’t change the view that US inflation is on a downward path towards the central bank’s goal of 2%, then share prices can recover.
I say’ recover’ because while the overall S&P 500 index has risen 15.4% year-to-date, if you take out the Magnificent Seven stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla), the rise is a lot smaller. As a group, they’re responsible for 28% of the index. If you look at something called the S&P 500 equal weighted index, the rise is only 1%!
At the end of October, Brian Lester, Chief Investment Officer at CFA, calculated that year-to-date, the Magnificent 7 index had returned 94% and accounted for 87% of the appreciation of the S&P 500 index.
While I don’t believe these top US stocks will go backwards to such an extent that they’ll stop the index from growing, their gains could be small in 2024 compared to other S&P 500 stocks that have been ignored or dumped since interest rates started to rise in early 2022.
If you like, the Magnificent Seven could behave stock pricewise like the Commonwealth Bank (CBA), which climbs progressively and underpins a rising market, without being the central cause of a big rise in the index. It’s why what Rudi Filapek-VanDyck said about BHP and the big iron ore miners will be important for our S&P/ASX 200 Index for 2024. In my interview for today’s Switzer Investing TV, Rudi says BHP and the other big miners could work against the index going higher, if China doesn’t succeed in stimulating more growth than it’s presently achieving. It’s why I see China as really important for my positive view on stocks for 2024. While Wall Street is certainly going to be a prime mover to help our index go higher, we need China to get back in the growth game to give the market real oomph.
If China can surprise, lifted by Beijing spending to ‘save face’ as the world’s second biggest economy, and the S&P 500 is on the rise as the US beats inflation and we hit the top of our interest rate cycle and start talking about cuts later in the year, our stock market is bound to buy up in advance of those cuts.
That’s the basis of my positivity for stocks ahead, despite the probability of a slowdown in the Oz economy, which the RBA doesn’t think will be dramatically worrying, which should help stocks.
This report from AMP economist Diana Mousina is worth taking on board if you’re too worried about the economy: “The RBA also significantly revised up its near-term GDP growth forecast to 1.6% by Dec-23 (from 0.9% previously) and made slight revisions to medium-term forecasts, with 2% GDP growth expected by Dec-2024 (from 1.6% before) and 2.4% by Dec-25 (from 2.3%). Expectations for the unemployment rate were revised down, with the unemployment rate reaching a high of 4.3% by mid-2025 from 4.5% previously.”
Clearly, if growth is better than expected, then company profits might also be better than expected and therefore the negativity we’ve seen towards stocks until the past week may well be misplaced.
As you can see, the case for optimism for stocks for the next couple of months and rolling into early 2024 looks believable. At least a first-half good run for stocks ultimately was showing in Rudi’s crystal ball, but he did have some reservations, for example, if economic data shows inflation starting to rise again.
At the moment, inflation looks like it could be helped along down by the big drop in the oil price over the past month. Last week, CNBC reported that “U.S. crude prices on Tuesday fell below $78 a barrel to hit the lowest point since July as weak global economic data overshadowed concerns that the Israel-Hamas war could erupt into a broader regional conflict.”
Inflation-fighting central banks and interest rate payers need a break, and a fall in oil prices should help CPI readings over the next few weeks. The US gets one on Tuesday. This number could help or hurt this current nice bounce for stocks that looked really good on Friday in New York. The S&P 500 was up 1.56% on Friday and the Nasdaq put on 2.05%. However, it was the 4.05% rise of this index for the week that I liked even more.
So, what do we invest in 2024? Apart from the likes of CSL, Resmed, Macquarie and other quality growth stocks that have suffered because of higher interest rates and some other challenges, I like to play the indexes such as VAS for the overall top 300 stocks on our market. IHVV is a good way to play the S&P 500 with hedging for a rising $A, which I expect.
On 1 November, Finder.com.au reported this: “Westpac is predicting the Aussie dollar to be trading at 0.69 US dollars in December 2023, while NAB is forecasting a 1 AUD = 0.74 USD exchange rate by the end of the year.”
I also want exposure to small cap companies and will be looking for individual good buys in coming weeks, but I won’t rule out good fund managers who specialise in rounding up good value small caps.
On the subject of small caps and my argument that a lot of market-ignored companies will play catch up in 2024, I liked this from Josh Brown, a commentator on CNBC and CEO of New York City-based Ritholtz Wealth Management. This is a summary of what he said:
1. Recently, the small cap index in the US, the Russell 2000, hit its 52-week low and had it best 4-day rally in the past three months.
2. This has happened 19 times going back to 1980.
3. After these happenings, a year later the index was up 100% of the time!
4. And the average median gain was 26%.
Sure, the history shows small caps take time to rebound and play catch-up, but as long-term investors, not worrying about time is our competitive advantage. What we do have to learn is how to take profit on companies that aren’t long-term holds. I’ll look at that as well in coming weeks.
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