Happy 2024 everyone, let the fun begin

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Having taken the Christmas break off, we are back and starting another year, over ten years of writing these reflections on the markets. 2023 ended with what felt like excessive levels of optimism for the year ahead after nine straight weeks of stock market gains. One of the strongest rallies in modern history. Goldilocks and her porridge were going to be just right. Inflation was continuing to head ever closer to the Fed’s 2% target; that view was reinforced by the November inflation number as measured by PCE, which came in year over year at 2.6%, registering the lowest reading since February 2021 and coming in below economists’ 2.8% projection. The strong November jobs report suggests the economy remains resilient, and the soft landing remains on course. Then, of course, one has the opportunity AI will present in the year ahead to add to the optimism. Sentiment coming into 2024 feels the polar opposite to 2023, as the bears were out in force this time last year.

So, it was probably not entirely surprising that 2024 started cautiously. Increasing tensions in the Middle East add a touch of geopolitical risk to the outlook. The price of oil jumped amid news that Iran-supported Houthi rebels sent a warship into the Red Sea. Shipping group Maersk announced it was suspending transits through the North Sea after one of its vessels was attacked, adding to fears that the Israel-Gaza war could spread wider into the region. There was also mixed economic news at the start of the year as the Global Manufacturing Purchasing Manager Survey was a tad disappointing. According to the S&P Global report, US manufacturers PMI ended the year on a sour note. Output fell at the fastest rate for six months as the recent order book decline intensified.

The selloff at the start of 2024 was confined mainly to the sectors that had done so well last year. The “Magnificent 7” started the year with a magnificent hangover and probably not alone in that. Bond markets were also not left alone when it came to starting the year on a negative note. The head of the International Monetary Fund said the US economy is “definitely” headed for a soft landing thanks to the Federal Reserve’s “decisiveness” in taming inflation despite some pain from higher interest rates. Caveat emptor: as history tells us, the IMF’s ability to predict economic activity is pretty poor.

Tonight, we get the release of the Federal Reserve minutes from the last meeting of the year, which is more than likely to reflect the comments of Jerome Powell post the meeting, having led to further optimism that the Fed’s so-called pivot is about to happen sometime in the first half of 2024.

Earnings season will be the main focus into the New Year, analysts once again starting the year expecting earnings to grow in 2024 by around 10% relative to 2023. As for Q4 2023, earnings are forecasted, according to FactSet insights, to be 2.4% year over year. Employment reports are keenly monitored, and monthly payroll data due Friday is predicted to show a gain of 170k in employment and a 3.9% year-over-year rise in average hourly earnings. Happy 2024 to everyone, and all the best for the year ahead; let the fun begin.