2024: The Bull Case 🐂
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[This is the first text in the 2024 market overview series. The next one, to be published next Saturday, will deliver the bear case.]
A quick recap of 2023
12 months ago, as a turbulent bear market of 2022 was coming to a close, hardly anyone predicted that equity markets would rally so strongly in 2023, especially in the first half of the year, and heavily outperform almost all other assets. SPX is up 20% YTD (although it was down to only 8% not so long ago, in October), and NASDAQ is up 47%, with some of its individual names still in triple digits (like NVDA, or META, up 170% and 150% respectively).
Compared to those stunning returns, most alternatives were quite bad. Bonds kept going down for a third year in a row, and despite the rebound since Nov 1st, are still likely to end the year negative. Gold was also going nowhere by October, but has rallied strongly since, however still lower than equities (up 10% YTD). Commodities are down across the board as a consequence of falling inflation (oil had a rally during the summer, but that ended in Q4 and is now negative 10% for the year), as are most non-US alternatives. China’s stock market plummeted this year, and Europe’s equities didn’t provide a good alternative.
The only non-equity alternative that delivered strongly was crypto. BTC is up almost 160% this year. Its rally was arguably driven by the same powerful boost in AI this year (it was January when we got introduced to ChatGPT, if you recall) that kept fueling most of tech - the Mag7 in particular - and most other risk assets.
This type of reaction from equities and risk assets is all the more puzzling given that we survived a major banking panic in March. Rising interest rates and bond yields pushed many smaller banks, oblivious to interest rate risk, on the brink of bankruptcy, with Silicon Valley Bank and a few others reaching an inevitable end. A similar fate met Credit Suisse, a much bigger international player, which eventually got taken over by UBS. Even that failed to derail the rally in equities. The bears had to endure some tough short squeeze episodes several times this year.
We did, however, have a correction. From July 31st to Oct 31st, equities and bonds underwent a heavy sell-off. A greater than expected issuance of Treasuries pushed down bond prices, sending yields up to new highs, acting as a catalyst for the equity market sell-off.
But we are now ending the year with that entire 3-month decline being reversed in a matter of a few weeks (actually a couple of strong days scattered throughout November). The Fed started to pause, and is sending no further signs of new hikes, and the Treasury is reducing the supply of long term bonds, once again sending prices up and yields down. Bullish flows ensued, and the soft landing narrative reigns supreme. Merry Christmas and a Happy New Year indeed.
Will this continue in 2024?
The bulls say Yes! An emphatic yes.
Our task today is to understand why. I will write the narrative as is, without clouding it with my personal views. That will come in two weeks.
The bull case for equities - the soft landing narrative - rests upon 3 pillars:
The Fed is done hiking, and is likely to start cutting rates gradually, starting from May, maybe even March 2024. As inflation continues to go down, the Fed will reach its 2% target (or close to 2%) sooner than expected and start to cut. If this scenario materializes, it will be a huge boost for both equities and bonds (as yields will keep pushing down).
The economy is strong. Labor markets show no sign of distress, GDP growth is high, productivity is high. Risk of recession is getting lower.
These two factors, by definition, constitute a soft landing - inflation was reduced without triggering a recession.
Fiscal policy will be accommodative due to the 2024 election coming up. The Treasury is unlikely to cause more havoc with long term bond supply like it did in August, and the huge deficit itself represents a fiscal stimulus, so it’s difficult to see the economy undergoing a slump when fiscal policy supports growth.
Let’s unpack each.