Special Researcher Wang Yinggui and Liu Zhichen
In 2023, the performance of the US financial market can be described as "magical". As well-known American media have stated, investing in the S&P 500 in 2023 can be seen as a standout for any investment. As of December 26, 2023, the S&P 500 index rose 24.19%; The yield of treasury bond tended to be stable after rising, and the futures price of 10-year treasury bond rose slightly by 0.03%; The US dollar index (against major Western currencies) fell by 2.70%, while Bitcoin surged by 156.08%; Affected by rigid demand for oil, WTI futures fell 6.47% and Bloomberg Commodity Index fell 11.43%. The market performance next year depends on how the market influencing factors evolve this year.
The Federal Reserve dominates market sentiment decision-making but remains passive
The Federal Reserve has once again become the protagonist in financial markets. The Federal Reserve's predictions of important economic indicators are basically incorrect, with actual economic growth rates higher than expected, unemployment rates rising and inflation levels falling slower than expected. As in 2022, the Federal Reserve still directed dramatic changes in the financial markets, and its interpretation of inflation triggered a series of market chain reactions. Throughout the year, the Federal Reserve's decisions have always been in a passive state driven by market expectations, and its policy orientation is full of contradictions and sudden actions.
On February 1, 2023, Federal Reserve Chairman Powell believed that the process of de inflation had begun, but was still in its early stages; The Federal Reserve's monetary policy has not yet reached a sufficient level of tightening, and the interest rate hike cycle has not yet ended. On March 22nd, the Federal Reserve believed that inflationary pressure on core services, which account for 56% of the index, would not decrease. For this reason, Powell proposed two conditions for reducing inflation: economic growth is below long-term trends for a period of time; The job market is cooling down. He also warned the market that interest rate cuts are not part of the Federal Reserve's basic assumptions.
On May 3rd, the Federal Reserve's monetary policy statement abandoned the use of the term "sufficiently restricted" (monetary policy orientation must achieve); Powell conveyed to the market the signal of "suspending interest rate hikes" in June, and the primary issue for the Federal Reserve to consider is no longer interest rate hikes, but inflation trends. On June 14th, as expected by the market, the Federal Reserve suspended interest rate hikes. On July 26th, the Federal Reserve raised interest rates by 25 basis points in a state of extreme lack of confidence. This lack of confidence continued until September 22nd, when the Federal Reserve revealed information about another interest rate hike this year, which disappointed investors; The argument of "maintaining higher interest rates for a longer period of time" has scared investors away. At that time, Federal Reserve officials were conflicted about whether policy intensity was insufficient or excessive.
On November 9th, Powell stated at a forum of the International Monetary Fund that although inflation in the United States has come down, it is still far above the policy target of 2%, and there is still a long way to go to address inflation; The employment market remains tight, and the supply-demand relationship will gradually reach a balanced level; Economic growth is strong, but it will slow down in the coming quarters; The Federal Reserve will pay attention to the risks posed by strong economic growth to the supply and demand relationship in the job market and the governance of inflation, and will take corresponding monetary policy measures at any time. However, on December 3rd, the Federal Reserve's monetary policy suddenly shifted, emphasizing a balance between controlling inflation and promoting economic growth. Some Federal Reserve officials even expected to cut interest rates by at least 75 basis points next year.
The judgment of the Federal Reserve on the future economic trend is erratic, which is fully reflected in the change in the term structure of treasury bond bond interest rates. At the beginning of 2023, the basis points of interest margin for various maturities were small, but the basis began to expand in March and gradually narrowed in early May. In October 2023, the yield of ten-year treasury bond broke 5% (causing market panic), and then gradually fell back, now breaking 4%. The phenomenon of interest rate inversion of US treasury bond bonds still exists, indicating that the US interest rate market has not returned to normal. Therefore, many market analysts firmly believe that the problem of long-term interest rate inversion is a sign before the economic recession.
Industry performance differentiation in the stock market supported by technology stocks
The rise and fall of ten-year treasury bond bond yields have the greatest impact on the US stock market, especially the high-tech industry. As a valuation benchmark, an increase in interest rates indicates a decrease in stock market valuation, while a decrease in interest rates indicates an increase in stock valuation. As shown in Figure 2, when the yield of 10-year treasury bond rises, the S&P 500 index falls, which was particularly evident in the third quarter. So far, the US stock market has fully recovered from its losses in 2022 (down 19.44% last year). Compared with the first half of the year, the upward trend in the second half of the year has expanded to more industries, but there are still significant differences in the performance of industry indices.
The S&P 500 index includes real estate, communication services, consumer goods, energy, finance, healthcare, industrial manufacturing, information technology, materials, and utility industries. In 2023, the rising industries of US stocks include real estate, communication services, consumer options, financial services, industrial manufacturing, information technology, and materials, while the falling industries include consumer essentials, energy, healthcare, and utilities. Among them, the industries of communication services, information technology, and consumer optional products have seen astonishing growth; From a ten-year perspective, information technology and consumer options are also the biggest winners (see Figure 3 for details).
The performance of the "seven giants" in American technology is particularly outstanding. As of December 26th, Apple, Microsoft, Amazon, Nvidia, Google, Meta, and Tesla have risen by 45.3%, 55.57%, 84.96%, 234.18%, 55.37%, 185.06%, and 109.72% respectively, an increase of a total of $5.16 trillion compared to the end of 2022, contributing more than 66% to the growth of the S&P 500 index. Although they only account for 28.27% of the index, the performance of the "seven giants" will also be related to the trend of the US stock market next year.
Unlike the secondary market, the performance of the US stock primary market remains sluggish and the market is still recovering. According to the Securities Industry and Financial Markets Association (SIFMA), from January to November this year, the total amount of stock financing by American companies was $129.5 billion, slightly higher than the same period last year's $93.1 billion, and overall lower than the normal level before the pandemic. Among them, IPO, additional issuance, and preferred stock financing amounted to 19.7 billion, 92.5 billion, and 11.7 billion US dollars respectively.
The bond market has performed relatively normally. From January to November this year, the financing amount in the bond market was $7.85 trillion, slightly lower than the same period's $8.53 trillion. Among them, the newly issued treasury bond, real estate mortgage bonds, corporate bonds, local government bonds, institutional bonds (bonds guaranteed by the three major U.S. real estate institutions), and asset mortgage bonds were $3.36 trillion, $1.22 trillion, $1.41 trillion, $0.35 trillion, $1.26 trillion, and $0.25 trillion, respectively. What worries the market is that the subscription rate of long-term treasury bond is not high at present, which is lower than the historical normal level.
The US dollar exchange rate first rises and then falls, and cryptocurrencies have strong momentum
With changes in the Federal Reserve's monetary policy, the US dollar has shown a trend of first rising and then falling against major currencies. Among the most active currency pairs in trading, the US dollar depreciates against major European and American currencies, appreciates against major East Asian currencies, and fluctuates against other currencies. Specifically, as of December 26th, the euro, pound, Swiss franc, and Canadian dollar have appreciated by 3.11%, 5.17%, 8.30%, and 2.68% against the US dollar, respectively; The US dollar appreciated by 8.73%, 3.66%, 2.60%, and 0.52% against the Japanese yen, Chinese yuan, Korean won, and Indian rupee, respectively, and depreciated by 1.23% against the Singapore dollar; There has been almost no change in the Australian dollar. The end of the Federal Reserve's interest rate hike cycle has eased the pressure on the global foreign exchange market. However, due to the consistency of monetary policies between central banks in Europe and America and the Federal Reserve of the United States, their currencies are less affected by the spread between their own currencies and the US dollar, while major Asian central banks adhere to autonomous monetary policies, and their currency exchange rates are more affected by the spread.
Due to inflation becoming a common problem faced by most countries and regions around the world, the investment industry is actively seeking safe haven assets, and Bitcoin has once again entered the industry's field of vision. This year, due to scandals within the industry, the cryptocurrency world has experienced significant fluctuations, with prices skyrocketing and plummeting. But as the trial of former FTX CEO Sam Bankman Fried progresses, the truth of the case is revealed, and the mainstream enthusiasm for crypto assets in the investment community is once again ignited. For example, BlackRock submitted an application to the US Securities and Exchange Commission (SEC) to establish a Bitcoin spot ETF fund, sweeping away the downturn in the cryptocurrency market. Bitcoin prices quickly broke through the key technical level of $40000 and drove other cryptocurrencies up significantly.
The performance of commodity markets is vastly different. Gold prices are eye-catching
The commodity market mainly includes metals, energy, agricultural products, etc. In the metal market, precious metals (gold) perform very well, while base metals are not as satisfactory. In 2022, global central banks significantly increased their holdings of gold, pushing up the price of gold. Inflation pressure still exists in 2023, and gold continues to play its role in preserving value. As of December 26, gold futures prices have risen by 13.73%, while silver has only risen by 1.93%. Except for copper, which rose by 2.66%, other metals experienced varying degrees of decline. Among them, platinum (platinum) fell by 7.76%, palladium fell by 34.06%, nickel (used for automotive batteries) fell by 44.67%, aluminum fell by 2.96%, and zinc fell by 12.40%.
In 2023, the energy market will be greatly affected by rigid demand, but its sensitivity to international geopolitics will weaken. Although the conflict between Russia-Ukraine conflict remains, the situation in the Middle East is tense, and no matter how Russia and the OPEC (Organization of Petroleum Exporting Countries) led by Saudi Arabia cut production, the energy market is still very weak. So far, WTI has fallen 6.38% and Brent has fallen 6.04%. The UK economy is in recession, Europe is in a quagmire, China's demand for oil is weakening, and crude oil prices lack upward momentum. It can be seen that economic weakness and green transformation have a long-term destructive effect on oil prices.
In terms of agricultural products, there is also a significant difference in prices for grains, soft commodities, and meat. In terms of grain, wheat, corn, soybeans, and brown rice in the United States fell by 19.74%, 29.27%, 13.60%, and 2.49% respectively. In terms of soft commodities, US No. 2 cotton fell by 3.81%, while wood rose by 10.07%; Cocoa, coffee, orange juice, and No.11 sugar increased by 65.23%, 16.50%, 55.5%, and 2.1% respectively. In terms of meat, live cattle and beef cattle increased by 22.38% and 10.26%, but the price of lean pigs decreased by 21.04%.
What will the financial market do in 2024 when the US economy enters a new normal?
The monetary policy orientation of the Federal Reserve remains the most important factor affecting financial markets. When will the Federal Reserve cut interest rates? How many times is it reduced? According to the forecast by Federal Reserve officials on December 13th, the median growth rate of the US economy in 2023 (the same below) will be 2.6%, but the growth rate will decrease to 1.4% in 2024. Obviously, as with market consensus, Federal Reserve officials predict that economic growth next year will not be as strong as in 2023, and the effects of interest rate hikes and inflation will ultimately affect economic growth; The unemployment rate will naturally rise from the current 3.8% to 4.1%. The financial market is not very focused on economic growth and unemployment rates, but continues to track changes in core inflation (Core PCE). Federal Reserve officials predict that inflation will drop from the current 3.2% to 2.4% by the end of 2024.
Based on the current economic situation, Federal Reserve officials predict that the federal funds rate will drop from the current 5.4% to 4.6% by the end of 2024, which is estimated by the market to be at least 75 basis points lower next year (3 cuts), while some believe it will be reduced by 120 basis points. However, according to the released data, the predicted number of officials at 4.6% is 6, the predicted number of officials above 4.6% is 8, and the predicted number of officials below 4.6% is 5, indicating significant internal differences within the Federal Reserve. And these predictions are only predictions from officials, but they are not actual policy blueprints, so investors cannot be too realistic, especially since Federal Reserve officials often make one mistake or another.
In fact, some people in the market have decomposed and read the Federal Reserve's forecast data, to the extent that several Federal Reserve officials have stepped forward to pour cold water. In my opinion, a new normal has emerged in the US economy: the job market remains strong, the economy continues to grow, but inflation has cooled down. That is to say, the relationship between the job market, economic growth, and inflation is weakening, or in other words, it is no longer as stable. Of course, the US economy is no longer a pure market economy. Since the 2007-2009 financial crisis, there have been significant changes in the economic growth model: fiscal stimulus and quantitative easing monetary policy have sustained economic growth. Once the stimulus weakens, the US economy returns to its previous period of low growth. From the recent two economic recessions, it can be seen that the destructive power of the crisis is increasing, and the responsibility for rescuing the market is also increasingly falling on the shoulders of the Federal Reserve.
In addition, international geopolitics will continue to affect inflation, but its impact this year is very limited. No matter how the Russia-Ukraine conflict evolves, or how the situation in the Middle East changes, global inflation will slow down. Inflation is no longer the core issue of concern to the Federal Reserve, and economic growth is on the agenda of the Federal Reserve. Based on the above analysis, given the previous mistakes, the Federal Reserve will also act cautiously in 2024 and continue to observe the development trend of inflation. It will consider reducing interest rates once the dust settles. The sustained inflation and interest rate costs for over two years have weakened household consumption capacity and increased corporate interest costs. Therefore, the author predicts that the fatigue of the US economy in 2024 may manifest in the first quarter, and the second quarter will continue to be mild and weak. The Federal Reserve may choose to decide to cut interest rates at its June or July meetings.
Looking ahead to 2024, the US general election is a widely influential political event, and the election results will have a significant and profound impact on politics, economy, military, and diplomacy for the next four years. Since the end of World War II, the United States has held a total of 18 general elections, with the S&P 500 index increasing by an average of 11.02% (including dividend returns) in the election year, and the probability of stocks rising is 88.89%. However, since 1980, a total of 11 elections have been held, with the index rising by an average of 8.82%. In the post-war election year, the S&P 500 index only experienced a decline for two years, in 2000 (down 9.1%) and 2008 (down 37%), respectively. Of course, the performance of the stock market next year cannot be inferred from these historical data, but must also be based on the current actual situation, as the economic environment is new year by year.
Firstly, the Federal Reserve's monetary policy will continue to support the US financial market and gradually become neutral. The phenomenon of interest rate spread has been corrected, either long-term interest rates will rise or short-term interest rates will decrease, but the possibility of long-term interest rate rise will be greater, and the impact of interest rate factors on the financial market is not as significant as in 2022 and 2023.
Secondly, the performance of US technology stocks will determine the overall trend of the stock market for the new year. As mentioned earlier, the "seven giants" of American technology led the market's upward trend in 2023, and whether it can continue to rise in 2024 is a key factor in market performance. Except for generative artificial intelligence, other technology fields are in a contraction position, and the idea of expecting technology stocks to continue to exert force may not be very realistic. Can technology giants produce performance that is commensurate with their stock prices? It is expected that the performance of the US stock index will be relatively flat in 2024, with an increase or decrease of 8% being normal.
Once again, the strength of the US dollar is weak, but the downward momentum is stronger, and the US dollar will depreciate to a certain extent against major currencies. Cryptocurrency assets have a certain market foundation, and if BlackRock's application is approved, Bitcoin still has some room for appreciation, but the momentum will be weaker than in 2022.
Finally, in order to determine energy prices, crude oil prices should operate within the range of $50-85 per barrel. The price of gold will return to around 1800 once again, and the declining prices of agricultural products this year will stabilize and gain a certain increase.