After a strong Q4 rally for equity markets, we started 2024 with some market nerves as many felt that perhaps the rally had gone too far. The pattern of strong rallies fading and reversing over the previous three years (2020-2023), a turbulent period characterised by pandemic, war and inflation, appeared last year to have become something approaching a neurosis for markets.
Any and all rallies were viewed with scepticism, the imminent drop in prices after a rally widely anticipated, and optimism about the future for markets was (and remains) rare.
But despite this, January this year was a strong month for equities. Despite some wobbles, S&P 500 closed out January +1.7%, Nasdaq +1.9%, and our flagship global equity fund, DGT Managed, was up +2.3%. This is just one month of returns. Remember, we have another 11 months to go in 2024. A strong start to the year is a good omen, in our view, for a good year to come.
Stocks in Q4 2023 were very much in a sweet spot. Solid economic growth in the US, cooling inflation, the prospect of central bank rate cuts to come, together drove the Q4 rally in stocks. We think this supportive background environment will continue to support risk assets.
In addition to this supportive background for equities, we have new catalysts this year which will further support the rally, in our view.
The corporate earnings outlook remains strong. Earnings season for Q4 is now in full swing, and profit growth numbers have been good across multiple industries so far. Even stocks which performed poorly recently, like Alphabet (owner of Google and YouTube) which saw a 7% drop in its share price after announcing earnings, still reported solid numbers. Alphabet’s earnings showed strong growth across its businesses, the market just appears to have gotten ahead of itself a little on the share price and it gave back some of the performance. But the underlying fundamentals were strong.
It’s easy to forget but the pandemic and then the inflation scares of last year have hardened corporates, made them more resilient, with now stronger balance sheets, leaner cost structures, and business models which have adapted to a more uncertain world of supply chain snarls and geopolitical risks.
Stocks are now close to, or already hitting, new all-time highs. And this is not a reason to be nervous necessarily. When markets hit new all-time highs (taking the S&P 500 as a proxy for stocks), 7 out of 10 times the S&P 500 was up 1-year later, with an average return of +13% after the new all-time high comes in. New all-time highs, historically, have usually meant we will move to further new all-time highs in the near future.
Research from JP Morgan shows that in years where S&P 500 was up by more than +20% (remember last year S&P 500 was up +26%), in 8 out of 10 times the following year is a positive year for equity markets, with average returns of +14%.
Rate cuts are also a strong lead indicator if we look at history. On average, US stocks rise +16% in the year after the first Fed rate cut in a cutting cycle (assuming no recession). In fact, these years (rate cuts when there’s no recession) can be the some of the strongest years for returns in equities, with 5 of the best years for the stock market returns out of the past 40 years happening during these periods.
Beware the Cassandras and naysayers, they had their time in 2020, and 2022, two of the toughest bear markets in living memory. The time will come for optimism and bullish spirits to reign supreme for another cycle… and we think it is already here.
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