Stock investors have been enjoying a bull market since the beginning of 2023. Of course, this was not expected. Last year, equities in the United States could only be described as volatile and largely underperforming. The macroeconomic environment, already beleaguered with sustained supply chain bottlenecks from the pandemic, intensified in part by Russia’s invasion of Ukraine, causing commodities prices to elevate globally. The U.S. Federal Reserve has raised the federal funds rate 11 times since the central bank began its fight against inflation. However, there is still much to consider with stocks in 2024.
Despite all the frantic headlines, the Federal Reserve has come a long way. The latest consumer price index reading has inflation only rising 3.2% throughout the past 12 months, trailing behind where it peaked in July 2022 at 9.1%. The Fed’s ability to tame inflation without putting a wrench into U.S. economic growth spurred confidence in businesses, consumers, and investors alike. The Standards and Practices (S&P) 500 and the Nasdaq have risen 16.1% and 31.4%, respectively, in value year-to-date. Below are three reasons why global stocks still have plenty of room to rally in 2024.
The U.S. Federal Reserve could Begin Cutting Rates
The U.S. Federal Reserve has been raising interest rates since June 2022 to combat inflation, which reached a peak of 9.1% in June of last year. Despite equities performing well overall in 2023, there have definitely been bouts of volatility due to analysts wondering what the Fed will do next. Nonetheless, there is a lot of encouraging developments in the recently released economics data. While the consumer price index (CPI) came in at its lowest in last month’s read, there was also positive developments in the labor market where the Fed has been the most concerned. While U.S. job growth picked up in August, wage growth moderated and the unemployment spiked to 3.8%. For those who were concerned about a wage pressure in the U.S. labor market, those pressures seem to have tempered.
When the Fed convenes again this month, analysts expect them to hold rates steady, but that does mean there will not be another hike later this year. There very well could be another hike, but given Federal Reserve officials, including Jerome Powell himself, have signaled they want to proceed with caution, investors probably have little to worry about here. The U.S. central bank is likely at the end of its rate hike cycle, which means the Fed could start cutting rates in early next year. Lower interest rates would have the effect of reducing borrowing costs for businesses and consumers, stimulating spending and investment, and, of course, boosting stock valuations.
The U.S. Economy is Likely Headed for a ‘Soft-Landing’ Scenario
Some economists and market analysts were concerned the Fed’s aggressive rate hikes would push the U.S. economy into a recession in later in 2023. However, the U.S. economy has surprisingly remained resilient enough to withstand the monetary tightening and could possibly achieve a ‘soft landing’. A soft landing is a scenario where economic growth slows down but does not turn negative, avoiding a recession. In the first quarter of 2023, U.S gross domestic product (GDP) grew 1.1% on an annualized basis. Despite, the economy clearly moderating in growth, there was still expansion.
Forecasts for U.S. growth for the latter half of the year have increased due to sustained consumer spending and residential investments. Federal Reserve officials are increasingly optimistic they can avoid a U.S. recession. A soft-landing scenario will ultimately prevent a sharp drop in corporate earnings and consumer confidence, which are key drivers of stock performance.
Despite Headwinds, China’s Economy Will Remain Dynamic
China’s economy has recently been struggling with slowing growth, high debt, and geopolitical tensions, particularly with the United States. However, China’s economic woes are likely temporary, and its growth should pick up in 2024 for several reasons.
Despite the headlines you may have read, not everything is dreary. China’s “new economy” sectors, which include semiconductors and electric vehicles, have continued to grow in 2023. The country’s government has also signaled it is likely done with the tech regulatory crackdown. The economic data also looks to be improving with consumer prices in August rising out of deflation territory.
Moreover, it’s difficult to describe the recent property slump as anything short of a necessary bitter pill. The property sector composed approximately 30% of China’s overall GDP prior to the government imposing the “Three Red Lines,” which prevented unabated overleveraging in the real estate sector. In other words, China’s property sector was an asset bubble waiting to pop, but instead of waiting for a real disaster, the government essentially moved to pop the asset bubble itself.
Naturally, these policies would not come without their negative ramifications. However, this should not mark the “end” of China’s economy, just a needed reorientation, and with the dynamism in other emerging sectors, I believe the world’s second largest economy can pull it off. If it does, the global economy and global equities markets will be better off.
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