In thinking about the outlook for US equities in 2024, to start with it is worth reflecting on what happened last year.
Those investors with a positive outlook were never truly challenged as US equities climbed higher throughout 2023, albeit with a pause in Q3. This year will not be as easy.
Many pundits expect more volatility, and the bullish market might be in jeopardy.
However, there are five significant reasons to support the view that 2024 could be another good year for US equity investors.
1. Retail Fund Inflows Are Up
Historically, after a bear market hits a low point (as we saw in U.S. stock markets in October 2022), retail investors seem to continue to sell for about 12 months, until realising they should actually have been buying.
Right on time, in November 2023, long-term flows into mutual funds and ETFs turned positive. Based on past investor patterns, this shift is likely to persist. Investors are moving out of money market funds into riskier assets, and some of that money is finding its way into equities.
2. An Incumbent Is on the Presidential Ballot
Every time since 1944 that a U.S. president was running for re-election, stocks posted gains for the year.
It didn’t matter whether the incumbent won, just that there was an incumbent on the ballot. The average one-year return for U.S. equities during those years is 16%, spanning every one of the past 13 instances in which a president was seeking re-election.
This is not surprising, as the residing POTUS can pull levers to help boost the economy, for the short term at least. President Biden has gone to town on this, with his Infrastructure Investment and Jobs Act, the CHIPS Act, and Inflation Reduction Act.
As a result, the economy may stay stronger than most would expect.
S&P 500 Performance in Presidential Re-Election Years
Source: Strategas and Bloomberg. The index performance is provided for illustrative purposes only.
3. The Fed has curbed its Rate Increases
The impact of interest-rate increases or cuts on equity markets is subtle and indirect, but historically, the interval after a string of U.S. Federal Reserve rate increases ends and before the first -rate cuts begin is typically a good time for stocks.
The gains in the market since the Fed’s final hike in July 2023 are about average for stocks historically in such a period. But the Fed isn’t likely to start cutting anytime soon, leaving a window for the market to advance.
This time, the Fed didn’t raise rates to slow an economic cycle but to fight inflation, so when it does cut rates, it will be declaring victory over inflation; not easing because it is spooked by a stuttering economy.
Pessimists may view rate cuts as a sign of economic problems, leading to a pullback for stocks, so it may only be the more confident who stay bullish and stay invested, but that is still likely to be the right approach.
4. Inflation is Cooling
Good incremental news on inflation allows the Fed to continue to sound less hawkish, which can help the market.
On this point, it’s worth keeping in mind that the monthly consumer price index is measured on a year-on-year basis. Since inflation was high and climbing all the way into late spring 2023, inflation numbers should continue to look good for a while, at least compared to the last couple of years.
Later in the year, inflation numbers may look less impressive, as summer 2023 becomes the comparison data, and that might be a bit negative for stocks.
5. Market Breadth Has Turned Positive
During the early part of 2023, US market growth was driven primarily by the ‘Magnificent Seven’ Apple (AAPL) Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA).
The rest of the market trailed them by some distance, many in the red. However, by late Q4 2023, 90% of the stocks in the S&P 1500 index had moved above their 50-day moving average, (i.e., the overall direction in which stocks are moving) that is bullish for stocks.
This was when investors switched from selling to buying and was also reflected in the shift to fund inflows at the end of last year, as they were looking around for shares of companies that had not already gone up a lot.
When this positive market breadth is seen, the S&P 500 Index generally does very well over the next three, six and 12 months. What’s more, the equal-weighted S&P 500 has generally performed even better during a broad market thrust of this kind.
Conclusion
Regardless of the many global issues dominating news media at the moment, and quite possibly impacting on many regions of the world, the US equity markets seem to be ‘doing very nicely’ and seem likely to continue in the same way for some months to come.
The old adage ‘Don’t try to buck the market’ should be considered here – Increasing inflows, particularly into ETFs suggest the crowd are piling into the market.
The increasing growth of those medium and smaller constituents of the wider market over the last couple of months really strengthens the overall outlook for the S&P.
I take the view that most politicians are to be regarded with suspicion, and this means I have no real desire to see either Donald Trump or Joe Biden in the Oval Office next year.
However, this simply doesn’t matter to markets in 2024. History tells us that if an incumbent president is running for a second term, US equity markets are likely to come out on top, regardless of the election result.
We seem to have reached ‘Peak Interest Rate’ from the Fed, and this pause before the likely rate reductions later in the year perhaps presents the fifth indication that we have an investor’s window of opportunity.
For personal advice about this article, or any other financial subject, please do not hesitate to contact me
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