Financial Landscape Beyond the Magnificent Seven
The recent surge on Wall Street, often referred to as the Santa Claus rally and fueled by the impressive performance of the Magnificent Seven, has seen record highs for the Dow and the S&P 500. However, the question remains: will this momentum continue into the new year, or are markets in for a letdown?
Divergent Predictions for 2024
As is customary in December, economists from various financial institutions release their outlooks for the upcoming year. Predictions for 2024 vary widely, with JPMorgan analysts forecasting an 11% decline in the S&P 500 to 4,200, while Capital Economics anticipates a 17% increase to 5,500. Amid these disparate views, certain common themes emerge.
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Rate Cut Speculations
The recent Federal Reserve policy decision to maintain interest rates and hints at possible rate cuts in 2024 have contributed to the positive sentiment on Wall Street. However, the market’s expectation of more rate cuts than indicated by the Fed raises questions about the sustainability of the rally.
While the Fed signaled the possibility of three rate cuts in 2024, markets are currently expecting a lot more. According to the CME FedWatch tool, investors now see 6 to 7 rate cuts next year. Chicago Fed President Austan Goolsbee even told CNBC on Monday that he was “confused” about the jubilant market reaction to the central bank decision last Wednesday.
“It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear,” Goolsbee said on CNBC’s Squawk Box. “I was confused a bit — was the market just imputing, here’s what we want them to be saying?”
The market, he said, is expecting a greater number of rate cuts than the Fed. This raises concerns about whether the optimism is based on realistic expectations or speculative assumptions.
Emphasis on Active Management
Analysts are advising investors to take a more active approach to portfolio management in 2024. Given the unusual volatility in stocks and bonds this year, relying on broad market movements may not be sufficient. Active strategies, such as specific stock selection, are seen as crucial in navigating the unpredictable landscape.
“A lot of the good cheer on Wall Street is coming from last week’s Federal Reserve policy decision to keep interest rates the same and indications that there could be rate cuts next year. But celebrations may be a bit presumptuous,” wrote Jack Manley, global market strategist at JPMorgan. “Simply owning the indices will not suffice.”
Potential Shift from Tech Giants
The dominance of mega-cap tech companies, often referred to as the ‘Magnificent Seven,’ has been a driving force behind stock market gains. However, Goldman Sachs analysts suggest that these tech giants might take a back seat in the coming year. The focus could shift to cyclical sectors, such as consumer discretionary, industrials, and materials, along with a preference for small-cap stocks.
They expect cyclical sectors — the parts of the economy that are significantly affected by changes in the overall economic cycle, such as consumer discretionary, industrials, and materials — to be good bets. They also like small-cap stocks, or companies with a relatively small market capitalization ranging from about $300 million to $2 billion.
Economists at Morningstar agree. “With US index returns having been driven predominantly by large-cap growth companies that dominate index weightings—aka the ‘Magnificent Seven’—we’re finding valuation opportunities elsewhere,” wrote analysts Tyler Dann and David Sekera.
“Among the basket of undervalued and unloved assets, smaller-capitalization value stocks stand out,” they said. They’re also looking at sectors like banks and communication services.
Treasuries’ Choppy Waters
US Treasuries experienced volatility throughout the year, and analysts at Wells Fargo Investment Institute expect this trend to continue in 2024. Despite the expected fluctuations, long-term bond yields are considered attractive, presenting an opportunity for investors seeking high-quality income.
“We expect US Treasury yields to remain volatile in 2024, declining early on as the economic slowdown gathers momentum, but rising as the recovery evolves in the latter months of the year,” they wrote in their year-end outlook.
Still, they say that long-term bond yields look attractive.
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