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Wall Street: 2024 Is The Year Of The Pivot

  • U.S. and European equity markets have kicked off the new year on the backfoot, with both pulling back slightly on the second trading day of 2024 from 2023 record high closes. 
  • The U.S. energy sector has started the year on a more positive note, with the sector’s benchmark Energy Select Sector Fund (XLE) up 2.1% in the first two trading days.
  • The markets remain a bit edgy because of the uncertainty surrounding precisely when the Federal will start cutting rates.

U.S. and European equity markets have kicked off the new year on the backfoot, with both pulling back slightly on the second trading day of 2024 from 2023 record high closes. 

The S&P 500 was down 60 points to 4,714 from its 2023 close at 1130 hrs ET on Wednesday while the Stoxx Europe 600 was also down marginally. Yields on 10-year US bonds and German bunds have also started creeping up, with the U.S. rate quoted at 3.956% as money markets wagered on the Federal Reserve cutting rates by fewer than 150 basis points in 2024.

Thankfully, the U.S. energy sector has started the year on a more positive note, with the sector’s benchmark Energy Select Sector Fund (XLE) up 2.1% in the first two trading days and Brent and WTI gaining over 3% on Wednesday. 

Growing tensions in the  Middle East have worsened fears of oil supply disruptions after an Iranian warship entered the Red Sea and raised the specter of the conflict spilling over into the region.

The markets remain a bit edgy because of the uncertainty surrounding precisely when the Federal will start cutting rates, and also because the Fed has cautioned about the lingering possibility of a mild recession. 

Market action suggests there’s an outside chance of a 25-basis-point cut at just 12.9% in January, but a much bigger 87.1% chance that the central bank will leave rates unchanged when it releases its December meeting minutes on Wednesday at 1400 hrs ET. Fed officials held the policy interest rate steady in the 5.25% to 5.5% range at their meeting in mid-December, but signaled they would cut rates by at least 75 basis points in the current year as inflation steadily declines to the Fed's 2% target. Related: Oil Gains Over 3% On Libya, OPEC and Middle East Escalation

That said, equity markets remain largely bullish with Principal Financial Group predicting that 2024 is setting up to be the "year of the pivot."

Markets surprised to the upside in 2023, despite a host of challenges, and fought off a widely expected recession to finish the year near record highs. Looking ahead to 2024, the market rebound, combined with the Federal Reserve’s rate pause, has set the stage for a long-anticipated pivot toward rate cuts,” Principal said in an investor note.

In other words, investors are looking forward to further gains in the stock markets in 2024. The U.S. market returned just under 25% while its European peer gained 13% in 2023 amid optimism that central banks will return to a rate cut regime. Supporting the optimistic market viewpoint is the fact that headline inflation decelerated to 3.1% in November, unemployment has declined to 3.7%  while 2023 GDP growth could potentially clock in at 2.6% based on the Federal Reserve’s latest projections.

Source: J.P. Morgan

But it’s not just Wall Street that’s feeling upbeat about the new year. The American Association of Individual Investors has reported an underlying shift towards a bullish position with many bearish investor viewpoints now in the rearview mirror. 

According to a year-end sentiment survey put together by the organization, 46.3% of investors are bullish on the broader market; 25.1% hold a bearish stance while 28.6% remain neutral. While the majority of investors are still either bearish or neutral, it’s important to note that the sentiment has shifted dramatically over the past two months considering that only 24.3% of individuals were bullish while 50.3% looked at the market from a bearish lens when the survey was carried out on Nov. 1.

Historical precedent also seems to favor the bulls. 

On Monday, Ned Davis Research noted that the S&P 500 sat less than 1% from its all-time trading high of 4,818 that it hit on Jan. 3, 2022. The analysts have noted that the gap between those two peaks is the sixth longest between record highs, and such lengthy gaps tend to be followed by a period of outperformance.

There have been 14 cases of the S&P 500 going at least one year without an all-time high. After the record has been eclipsed, the S&P 500 has outperformed its long-term average one-, three-, six-, and 12-months later. One-month returns are not quite as strong (up 71% of the time by a median of 1.8%), suggesting a short-term overbought condition. One year later, the index has risen 13 out of 14 times by a median of 13.4%. A new high after a long stretch often marks a new stage of the bull market rather than its conclusion,’’ the analysts have noted.

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January Selloff For Megacap Tech Stocks

But not all corners of the market are expected to remain hale and hearty; at least not in the early innings of the year. Bank of America has warned about a January "rout" in megacap tech stocks, with Apple Inc. (NASDAQ:AAPL), Amazon Inc. (NASDAQ:AMZN) Alphabet Inc.(NASDAQ:GOOG), Meta Platforms Inc. (NASDAQ:META), Microsoft Corp. (NASDAQ:MSFT), Nvidia Corp.(NASDAQ:NVDA) and Tesla Inc. (NASDAQ:TSLA) in danger of underperforming.

"Crowding risk in the leaders of 2023 has been cited by many (including ourselves) as a key risk in 2024. In particular, year-end 'window dressing' may have pushed active funds into big Tech leaders, but these stocks could be used as a source of funds if a hard landing is avoided and leadership broadens beyond secular growth stocks," BofA equity strategist Savita Subramanian has said in a note. 

By Alex Kimani for Oilprice.com

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