Bullish bets for new year

Optimism returns after 2023 ended unexpectedly in the black

After a surprising rally in 2023, equities could notch further gains in 2024 on the back of lower rates, but risks in inflation, corporate earnings, and pivotal elections – including the US presidential race – could trigger a correction.

Despite faltering in the year’s final trading session, major equity indices ended 2023 with double-digit returns in a year many are calling the year of bad forecasts, as Wall Street had anticipated a recession, a bond rally and a rebound in China.

“Pretty much all the markets apart from China ended the year up pretty significantly and very few forecasters really saw that coming,” says Tim Richardson, investment specialist at Pengana Capital. “The world seemed a much more gloomy place this time last year. What’s really shifted is the perception of the likely trajectory of global interest rates.”

Propelled by the so-called “Magnificent Seven”, the Nasdaq led US indices with a gain of 43 per cent, while the broader S&P 500 jumped 24 per cent.

The surge – which was mirrored by double digit gains on leading Asian and European bourses – has surprised leading market watchers who had bet on a recession in 2023 given the Federal Reserve and other central banks’ aggressive interest rate increases to counter global inflation.

Many of the gains started accumulating in the two final months of the year, as investors interpreted moderating inflation and a still-strong labour market as indicating the US could avoid a recession.

In Australia, the shift in sentiment fuelled a 12 per cent reversal in the two months since the end of October, when the S&P/ASX 200 index was trading well in the red, to close the year up 7.8 per cent.

The final piece of good news came with the Federal Reserve’s December forecast of three interest rate cuts in 2024, one more than the markets were expecting.

“That’s probably the biggest thing that markets got wrong,” in 2023, Mr Richardson said.

Money markets are fully priced for a cut in the US benchmark rate by the Federal Reserve in March, a situation that most economists say is unlikely to occur.

And with many technical indicators pointing to markets being overbought, AMP capital chief strategist Shane Oliver says this increases the risk of a correction early in the new year.

“The rebound has been fairly broad based, which is a positive sign. But my concern in the short term is that the markets have run so hard that there is a risk of a correction some time early in the new year,” he said.

“There are still a lot of risks around recession. Inflation could prove stickier than the markets are assuming, or it might take longer for the Fed and other central banks to start cutting interest rates. There is also the situation in the Middle East, which continues to bubble along and could have a bigger impact if it expands.”

Dr Oliver also pointed out 2024 is likely to be more volatile than 2023 from a political point of view.

“Half the world is facing elections in 2024, including the US, Taiwan, Canada, India, Mexico, South Africa, and in the European Union parliament,” he said.

Ultimately, however, a downward trend in inflation and lower rates would likely help markets rise again in 2024.

Most stock exchanges around the world, including the US and Australia, will be closed on Monday for the New Year’s Day holiday.