To say the markets ended 2023 on a strong note would be an understatement. Most of last year, the markets were dominated by a handful of mega-cap stocks commonly referred to as the magnificent seven. The rest of the market limped along, until November when investors started to believe that the U.S. Federal Reserve (Fed) was going to begin rate cuts in early 2024.
As a result, both stocks and bonds rallied. As of last week, the S&P 500 and the S&P’s price-earnings ratio soared and were within striking distance of their all-time highs set in January 2022.
Driving investor’s optimism and the rally, was the newly updated estimate from the Fed suggesting there could be as many as 3 rate cuts in 2024. With inflation now steadily improving, it makes sense the Fed should be able to ‘give back’ some of its rate hikes; the question is, how quickly will they reduce rates, and by how much.
2024 Outlook
“This brings me back to my base case for 2024, which is a continuing bull market as the Fed pivots (at least initially), earnings advance, and the economy survives the great hiking cycle of 2022 to 2023. My strong hunch, based on market history, is that the bull market will broaden in 2024 – with a wide range of types of stocks advancing – rather than the narrow leadership we saw for much of 2023. But this is not a slam dunk.” Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company.
With regards to earnings, it appears the earnings contraction is behind us, bottoming in Q3 2023. We enjoyed 50% gains in 2021 and an 8% gain in 2022, the 4% contraction in 2023 is about as soft a landing as we could have hoped for.
Another important note for investors is that the S&P hit its all-time high early January 2022, which was also the starting point of that year’s bear market. This has been a long time for the markets to stay below all-time highs; historically, it takes an average of 48 months to recover back to previous highs. However, bear markets that do not include a recession (2022) have historically recovered in 11 months. This means, unless we are about to go into a recession, we may be due for new market highs.
Two Risks to the Outlook
First, by cutting interest rates too soon the Fed could threaten its progress on bringing down inflation to it’s targeted 2% level. If this happens, the Fed may have to walk back on the plan to cut interest rates. The second risk, that most of the good news on interest rates has already been priced into the markets, leaving little room for significant further gains.
Which direction will the markets go in 2024? No one really knows for sure; either way, markets don’t stay in one place too long. Best to maintain a good balance of both equity and fixed income, diversified over different industries and sectors – matched to your risk tolerance.
Happy New Year!
Tracey and Paige
Source: 2024 Stock Market Outlook by Fidelity Investments Canada