After a blistering rally for stocks in the back end of 2023, we’ve started this year with a few wobbles and a little bit of selling. This continues to be something we are not losing sleep over. It is normal for markets to consolidate and have short spells of selling, even during a strong bull market. Markets never go up in a straight line and spells like this current one are normal.
Recent economic data from the US continues to show a robust consumer and solid economic growth, while we have seen a dramatic decline in inflation around the world and we now have the prospect of potential interest rate cuts from the major central banks. This is a positive environment for stocks in 2024. With earnings season starting soon, the next positive catalyst for stocks in the short-term could be strong corporate earnings results.
Given, at time of writing, we are experiencing a bout of weakness in price action and given our bullish view on risk assets for the remainder of 2024, we thought it would make sense to highlight a likely source of bearish sentiment later this year. And this is a source of risk-off sentiment we have seen before, which could offer very interesting buying opportunities.
Donald Trump last week had a resounding victory in the Republican nomination race in Iowa. This early test of support within the Republican Party saw the former president hammer his rivals and is a clear indicator that he will almost certainly be the Republican candidate in the November US election.
As the probability increases of a Trump victory in November (which we expect could likely happen) we are also likely to see a repeat of the nervousness seen in markets in 2016. As that US election approached, there were bouts of volatility and selling in equity markets as the probability and associated uncertainty of a Trump victory became more apparent.
These short-term bouts of market weakness would have been good times to buy risk assets. There was a strong market rally after that election, despite Trump’s victory. Despite the worries pre-election about the outcome and concurrent bouts of market selling, 2016 was actually a strong year for equities, as was the following year too.
If the momentum behind Trump continues, we are likely to see some similar price action in markets this year. The global press will likely wax lyrical about the imminent threats to democracy, the economy, the outcome of the War in Ukraine, etc. because of a Trump victory, and this could feed into bouts of selling.
We think 2024 could look a lot like 2016 for equity markets. The tailwinds from economy and corporate earnings will be positive and support an upward trend in equity prices. But political concerns about the US election fed into short-term bouts of selling during 2016 and the same is likely this year too.
In 2016 those bouts of price weakness were excellent opportunities to buy stocks and benefit from the rally through 2016-2018.
History doesn’t repeat, but it does sometimes rhyme!