This is our annual review of the financial markets, and weekly update.
As we close out 2023, the analysts are talking about the great market rally in the year (perhaps conveniently forgetting the falls of 2022.) The S&P 500 slipped in the final session of 2023 to end the year up 24 per cent, but the two-year trip is back to where it started. The Dow Jones Industrial Average and the Nasdaq Composite both dipped on Friday but were 13.7% and 43.4% higher for the year, respectively, while MSCI’s world share index posted a 20% gain, its most in four years.
True, this year might go down as one of the most unusual ever in financial markets – mainly because everything seems to have come good despite a lot of turbulence and many predictions turning out to be wrong. And this against the backcloth of more regional conflicts, pressure on the consumer, and rising Government debt.
U.S. Treasuries finished the year broadly where they started after major swings for the benchmark in 2023. In the bond markets, just a few months ago investors were expecting the Fed & Co to raise rates and leave them there while recessions rolled in. Now bond markets are looking to central banks to embark on a rate-cutting spree with inflation apparently beaten.
Equity markets have gone up so quickly that they’re highly vulnerable to a pullback if the US economy slips into even a mild recession, according to Royal Bank of Canada’s fund management arm.
The greatest risk to the stock market in 2024 (bonds & metals) is the scaling down of market expectations for rate cuts as a result of renewed gains in inflation. Any credible and consistent signs of renewed inflation (not one-off bounces or base effects) would be punishing for markets.
But even if you think the probability of such inflation rebound is minimal, there is always the typical volatility in a US presidential election year.
According to seasonality studies stretching to 1900, April and May tend to be challenging months during US election years, but October fares worst as far as consistency of selloffs.
A third risk is that of persistently swelling budget deficits and the ever-expanding amounts of new debt issues to refund existing deficits. This could easily ignite another “bond market event” similar to September 2019, March 2020, or September 2022 in the UK.
Regional conflicts might well proliferate, causing more market turmoil. And finally, next year won’t be quiet on the political front. There are more than 50 major elections scheduled next year, including in the United States, Taiwan, India, Mexico, Russia and probably Britain. That means countries that contribute 80% of world market cap and 60% of global GDP will be voting. Taiwan kicks it off with elections on January 13, followed just a few days later by the New Hampshire primary for the 2024 U.S. Presidential race.
And remember from just before that stock panic in late February 2020 to mid-April 2022, the Fed ballooned its balance sheet an absurd 115.6% in just 25.5 months for crazy-extreme monetary inflation! Other central banks did the same. That monetary base more than doubling in a couple years is the dominant reason inflation has raged in recent years. The FOMC finally realized how dangerous its extreme monetary excesses were in mid-2022 as reported inflation soared. So the Fed has shrunk its balance sheet 13.8% since then. Yet crazily over these past four years, that monetary base has still skyrocketed 85.4% thanks to the previous decade’s growth! Inflation therefore is still in the system, “This is an era of boom and bust,” BofA said. “We are not out of the woods.”
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