5 Market Classes From 2023, And 5 Predictions For 2024

Glad New Yr! It’s January, which implies it’s time to supply predictions for what the brand new 12 months could deliver for international markets in 2024.

However first, it’s vital to replicate on what we realized over the earlier 12 months — and there was no scarcity of classes realized about markets, the financial system, and central banks.

So I’ll begin by reviewing my 5 key takeaways from 2023, after which supply 5 issues I count on to see within the 12 months forward.

2023: 5 classes realized

1. Policymakers around the globe are very delicate to the potential that one thing may “break” on account of the aggressive charge hikes we’ve got skilled. They had been proactive in addressing doable accidents, as we noticed through the mini regional banking crisis in March 2023, and likewise the UK gilt disaster in September 2022. That ought to present some consolation to buyers going ahead. I’m optimistic that policymakers will stay vigilant and rapidly react to any points that come up from the aggressive tightening that many central banks have engaged in, recognizing the lengthy and variable lags of financial coverage.
2. Don’t imagine what the Federal Reserve (Fed) tells you it’s going to do – imagine what the information tells you the Fed goes to do. As I’ve mentioned in current months, many central bankers have maintained a hawkish public face whilst substantial progress on disinflation continues. And so whereas the newest “dot plot” signifies the Fed expects to chop charges by 75 foundation factors in 2024,¹ I imagine the Fed will possible minimize between 100 and 150 foundation factors (in fact relying on the information).
3. Financial coverage has had an outsized affect on markets. Charges mattered loads final 12 months. This can be a hyper rate-sensitive atmosphere given the extraordinary tightening cycle many Western developed economies have skilled. A drop in lengthy charges within the final months of 2023 has had a strong affect on many alternative asset courses, from equities to mounted earnings to gold.
4. Don’t underestimate the facility of psychology in impacting an financial system. I anticipated a powerful rebound for the Chinese language financial system final 12 months given its post-pandemic re-opening, however I didn’t issue within the chance that enterprise and client sentiment could be tepid due to issues about satisfactory stimulus. Nevertheless, that additionally means that sentiment may rapidly enhance if companies and shoppers grow to be extra glad with coverage going ahead, and I count on that would be the case.
5. Diversification stays important, in my opinion. Contemplate what we noticed final 12 months inside a few of the main asset courses:

o Shares. Chinese language shares disillusioned as a result of financial issues I discussed above, however total, international equities gained greater than 20% final 12 months.²

o Bonds. International bonds skilled features for the 12 months, with European and US excessive yield bonds because the standouts.³

o Commodities. Commodities posted losses, however gold was a juggernaut final 12 months with demand helped by geopolitical threat shopping for, central financial institution purchases, and falling charges later within the 12 months.⁴

In abstract, and fairly clearly, 2023 was an excellent 12 months for markets – a balm for the injuries created by the annus horribilis that was 2022. If 2022 was captured in a rustic music music title, I imagine it could be “How Can I Miss You If You Won’t Go Away?”

However I undoubtedly don’t really feel the identical means about this previous 12 months. If 2023 had been captured in a rustic music title, I believe it could be “If You Leave Me, Can I Come Too?”

In different phrases, 2023 was an excellent 12 months, and I don’t assume most of us could be keen to start out 2024 if we thought the investing atmosphere would change.

Fed in focus as 2024 begins

Now the primary days of 2024 have sadly been tougher. That may be a reflection of tension and confusion round how a lot the Fed will minimize charges this 12 months. This has been fueled by some hawkish “Fedspeak” in addition to some current information.

However as Dallas Fed President Lorie Logan defined in a current speech, “Restrictive financial conditions have played an important role in bringing demand into line with supply and keeping inflation expectations well-anchored.

We can’t count on sustaining price stability if we don’t maintain sufficiently restrictive financial conditions.”⁵ This helps to explain why we have been hearing hawkish talk.

While I think some concern and volatility will persist, I believe data over the next several months will provide greater clarity that the Fed will cut rates significantly this year, which should be supportive of equities and fixed income.

In other words, I think the first half of 2024 will largely be a continuation of the last few months of 2023 albeit with more volatility.

2024: Five predictions

1. I expect at least one election to have a surprise outcome. But as we’ve seen before, elections don’t matter for markets in the longer run, so I don’t believe it’s worth worrying about. (Read my colleague Brian Levitt’s analysis of US presidential elections and stock market performance.)
2. I expect more hawkish Fed speak early in the year. This is how the Fed keeps a lid on easing financial conditions (see the quote from Laurie Logan above). However, it can send yields higher and stocks and other assets lower, so we need to recognize the potential for greater market turbulence.
3. I expect market breadth will continue to expand. In other words, I believe market performance will no longer be driven by just a small handful of stocks, as it was during 2023. I’m most excited about small-cap equities, as well as emerging markets equities and emerging markets bonds.
4. I believe the “fear of missing out” on market efficiency will speed up in early 2024, main cash-heavy investors to move into stocks and fixed income strategies. I expect diversification to increase as investors rebalance and increase exposure to underexposed areas.
5. The back half of the year is likely to be more tempered for equities; we could see some “give back” of gains from earlier in the year as markets worry about and discount 2025.

Dates to look at

Click on to enlarge

Footnotes

1 Source: US Federal Reserve, as of Dec. 13, 2023

2 Source: Bloomberg, as of Dec. 29, 2023, as measured by the MSCI ACWI price index. The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets. Price indexes do not take into account dividends and cash payouts.

3 Source: Bloomberg, as of Dec. 29, 2023. European and US high yield bonds measured by the ICE Bank of America Euro High Yield Index and US High Yield Index. The ICE Bank of America Euro High Yield Index tracks the performance of euro-denominated, below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. The US High Yield Index tracks the performance of US-dollar-denominated, below investment grade corporate debt publicly issued in the US domestic market. Global bonds measured by the ICE All Maturity Global Broad Market Index, which tracks the performance of US-dollar-denominated, below investment grade corporate debt publicly issued in the US domestic market.

4 Source: Bloomberg, as of Dec. 29, 2023. Commodities measured by the S&P GSCI Index. The S&P GSCI Index is an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets. Gold spot prices based on Bloomberg aggregated data.

5 Source: Federal Reserve Bank of Dallas, Jan. 6, 2024

Necessary data

NA3313772

Header picture: 10’000 Hours / Getty

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

Should this contain any forward looking statements, understand they are not guarantees of future results. They involve risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from expectations.

Diversification does not guarantee a profit or eliminate the risk of loss.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries

The Federal Reserve’s “dot plot” is a chart that the central bank uses to illustrate its outlook for the path of interest rates.

UK gilts are bonds issued by the British government.

A basis point is one hundredth of a percentage point.

Disinflation, a slowing in the rate of price inflation, describes instances when the inflation rate has reduced marginally over the short term.

Fedspeak is a technique for managing investors’ expectations by making deliberately unclear statements regarding monetary policy to prevent markets from anticipating, and thus partially negating, its effects.

Inflation is the rate at which the general price level for goods and services is increasing.

Hawkish is to favor relatively higher interest rates if they are needed to keep inflation in check.

Yield is the income return on an investment.

A high yield bond is a bond that is rated below investment grade at the time of purchase.

Tightening monetary policy includes actions by a central bank to curb inflation.

Risk assets are generally described as any financial security or instrument that carries risk and is likely to fluctuate in price.

The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets. Price indexes do not take into account dividends and cash payouts.

The ICE Bank of America Euro High Yield Index tracks the performance of euro-denominated, below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. ICE All Maturity Global Broad Market Index tracks tracks the performance of US-dollar-denominated, below investment grade corporate debt publicly issued in the US domestic market.

The S&P GSCI Index is an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets.

The opinions referenced above are those of the author as of Jan. 8, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes.

Five market lessons from 2023, and five predictions for 2024 by Invesco US