The bet on the US Federal Reserve's interest rate cut pushed the US stock market to soar at the end of last year. The rapid decline in the yield of US treasury bond bonds helped the three major stock indexes end the 2023 trading with nine consecutive positive weekly lines.
Historical data shows that the strong performance of the US stock market in the previous year often extends into the next year. However, at the beginning of 2024, investor sentiment seemed cautious, and the future prospects of interest rate paths will be directly tested by various factors. Some market participants are concerned that if inflation or the economy is better than expected in the future, it will cause the dovish stance of the Federal Reserve to waver and the market will face challenges.
Historical data is optimistic about this year's market trend
From a historical perspective, the significant rise in the US stock market in 2023 may further boost this year's stock market.
According to LPL Research data, after experiencing a rise of over 20% in the previous year, the S&P 500 index rose an average of 10% in the second year, higher than the historical average, with a staggering 80% probability of year-end gains. "A strong momentum will generate new momentum," said Adam Turnquist, Chief Technology Strategist at LPL Financial.
Ryan Detrick, Chief Market Strategist at Carson Group, found that since 1950, the S&P 500 index has experienced a rebound of at least 10% after falling more than 10% in the previous year, with an average return rate of 11.7% in the following year. He mentioned in the report that these data explain why 2024 should be a bullish sentiment.
Challenging historical highs is an important driving force behind the rise of the stock market. Ed Clissold, Chief US Strategist at Ned Davis Research, stated that since 1928, there have been 14 instances of at least a year long gap between the historical highs of the S&P 500 index. At present, the gap between the S&P 500 index and its 2022 high is less than 1%. Statistics show that after reaching a new high, the index can rise by 14% that year.
Investors are paying attention to the prospect of the Federal Reserve cutting interest rates. According to data from the Chicago Mercantile Exchange's FedWatch tool, the likelihood of a rate cut at the Fed's March meeting is close to 70%. The past monetary policy cycles have shown that the stock market often rises during periods of suspension. According to ClearBridge Investments analysis of the past nine cycles, the S&P 500 index rose an average of 5.1% between the Federal Reserve's pause in rate hikes and the first rate cut.
Election factors are also potential boosters, said Sam Stovall, Chief Investment Strategist at CFRA. "History is a good guide, including the history of presidential election years. In the year in which the current president seeks re-election, regardless of who wins, the average total return on the S&P 500 index is 15.5%. Basically, all historical indicators I see point to a positive year."
Ed Yardeni, a well-known long in the US stock market and founder of Yardeni Research, predicts that the S&P 500 index is expected to challenge 5400 points this year, and has given 12 reasons for optimism, including the resumption of normal monetary policy, consumer purchasing power, strong household wealth liquidity, strong labor demand, the certainty of real estate recovery, historic high corporate cash flow, and the increasing productivity of the high-tech revolution.
A short-term test is coming soon
After nine consecutive weeks of gains, the market seems to be slightly fatigued in the first week of the new year, and there are still hidden dangers in the overbought technical indicators and sustained ultra-low volatility after continuous gains. The American Association of Individual Investors (AAII) market sentiment indicator shows that the proportion of bullish investors in the future has fallen from a two and a half year high, and risks of profit taking and insufficient momentum seem to be brewing.
A report released by Goldman Sachs trading last week showed that CTA trading, which tracks trends, is gradually decreasing after driving the US stock market higher at the end of last year. This may limit further market upside. CTA strategy (Commodity Trading Advisor), also known as Commodity Trading Advisor strategy. As a common pattern among them, by identifying long-term trends in the market, the strategy model will attempt to follow these trends and conduct trading. When the market is in an upward trend, the strategy will engage in long trading (buying). In recent years, CTA has had a significant influence in the stock, fixed income, and commodity markets.
Goldman Sachs' model found that when it comes to exposure to the S&P 500 index, CTA's long positions have almost reached their limit. According to Goldman Sachs data, this type of transaction has a bullish exposure of approximately $40 billion to the S&P 500 index and an exposure of nearly $150 billion to global stocks. This indicates that even if global stock markets continue to rise, CTA's ability to continue chasing gains may have reached its limit.
Boris Schlossberg, macro strategist at BK asset management, said in an interview with First Financial that as long as economic data continues to support a soft landing, the Federal Reserve can move towards interest rate cuts, and the path with the least resistance seems to be still upward. But the problem now is that the market seems to be too optimistic. "During this period, the US stock market has been in an incredible operating state, pushing valuations very high." He analyzed, "Whether it's a hard landing or a soft landing, the economy is slowing down, and it is expected that consumer spending will slightly decline in the coming quarters. Obviously, there is a risk involved."
Scott Wren, Senior Global Market Strategist at Wells Fargo, said, "Profit expectations, economic and interest rate forecasts have all shown optimism, with the possibility of a short-term decline far greater than an increase as the S&P 500 approaches the top of its recent trading range." Considering economic uncertainty, he set the target price for the S&P 500 index in 2024 at around 4700 points.
A new round of challenges is approaching. This Friday, the US Department of Labor will release its December non farm payroll report, and the market is expected to add 150000 new jobs with a salary growth rate of 4.0%. Better than expected data may prompt the Federal Reserve to continue patiently waiting for the timing of interest rate cuts. The new US inflation report to be released next week also carries hidden risks. The Cleveland Fed's inflation forecast shows that the core CPI rose by more than 0.3% in December, which, if realized, would be a new high since May last year.
Schr ö sberg told First Financial that from the statements of Federal Reserve officials, substantive discussions on interest rate cuts have not occurred. He expects that March may be the earliest time to discuss how to lower interest rates unless there are sudden events such as unexpected economic cooling in the short term.
In addition, before the first decision of the Federal Reserve in the new year, the market will usher in a new financial reporting season. Considering the current valuation level, investors are now facing the challenge of whether listed companies can live up to expectations and confirm the end of the profit decline cycle. According to a survey released by FactSet, analysts expect the earnings of S&P 500 index constituent stocks to increase by 11.7% this year.