Economic data releases in early 2024 continue to confirm the likelihood of a soft landing outcome. And S&P 500 companies are likely to report more than 4% year over year earnings growth for the 4th quarter of 2023, again beating analysts’ forecasts. These are exactly the outcomes investors were hoping for as they bid up risk assets at the end of 2023.
Yet, capital markets, stocks, bonds, and commodities are off to a sluggish start in the first to weeks of 2024. So, what’s the problem? And what do investors need to reignite 2023’s powerful yearend ally?
There are at last two challenges for the markets as 2024 begins. First, a lot of this year’s potential early returns were pulled into the massive rally in risk assets in November and December 2023. Second, investors’ reactions to economic data releases and earnings results underscored just how difficult it is to stick the soft landing. The data can’t be too hot or too cold. It has to be just right. It has to be perfect. The margin for error to achieve a soft landing is incredibly narrow.
Investors need four things in order for the risk rally to get back on track in 2024. First, they need greater clarity on the future path of monetary policy. There remains a gap between how many interest rate cuts markets are expecting – six – versus what the Fed is promising – three. That needs to be reconciled. Also, when will the cutting cycle begin? Based on current data, it doesn’t look like March will be the beginning of rate cuts. We need clarity, or investors need clarity, in order to reignite the rally.
Second, we need better forward guidance from corporate executives on earnings calls. The earnings numbers will beat or surpass analysts’ expectations. They always do. So, a high percentage of companies will beat expectations by a significant amount and will have positive earnings growth. These are good results. But what we need to hear from corporate executives on earnings calls is that the outlook for the rest of the remainder of the year is strong, they don’t see a recession, and that they anticipate that inflation will continue to fall. More positive outlooks during these earnings calls are required for this market to get back on track.
Third, inflation measures have to move more forcefully toward the Fed’s 2% target. This has to happen in a more consistent way. So, the last CPI reading saw a bit of a resurgence in inflation. We need all of these measures, especially the ones the Fed cares most about or watches most carefully need to be trending closer toward its 2% target. Variations from that cause investor anxiety.
Finally, cooling tensions in the Middle East, more specifically in the Red Sea shipping lanes, are needed. So, one of the enduring lessons from the pandemic is that supply chain issues are painful. They are inflationary. And they increase investor anxiety. So, a resolution or a thawing of tensions in the Red Sea shipping lanes would help to soothe markets.
After such a strong rally to conclude a surprisingly strong and resilient 2023, I’m not surprised at the market’s sluggish start to 2024. It’s only been a couple of weeks. I’m hopeful that as the first quarter of 2024 progresses that investors will get the clarity that they so desperately seek.
