January is now history, leaving a positive impact on the markets. The S&P 500 closed the month with a 1.6% increase, while the Nasdaq registered a 1% advance. The first month of the year is always full of discussions about how the remaining months might evolve. That said, certain key themes will be on almost every investor’s mind throughout 2024. Here are some perspectives on these.
Can the Economy Continue to Grow at the Same Rate? 2023 was billed as the year of the recession that never came. So far, some signs suggest continued economic resilience. This has generated the possibility of thinking about a very optimistic “Goldilocks” scenario, implying solid growth and declining inflation. Fourth-quarter 2023 GDP data showed a 3.3% year-over-year increase, with the labor market remaining solid, as indicated by the most recent nonfarm payroll report. Looking ahead, it is not out of the question that the economy will experience a deceleration, allowing for a soft landing, meaning healthy employment generation and inflation slowing to the target range. This environment could allow the Federal Reserve (FED) to begin adjusting rates before the end of the first half of the year (the market is discounting a total cut of 100 basis points for the full year), after Jerome Powell made it clear that there would be no adjustment in March.
Will the Dominance of the Magnificent 7 Persist? While there is optimism around the tech sector and the “growth” style, it is unrealistic to assume that these tech giants will perpetually rise together. A high standard implies a small margin for error, as evidenced by the fall of Google and Tesla after reporting lower-than-expected numbers, while Meta and Microsoft presented solid reports. Now, these companies will have to excel in all aspects to please the markets. A key theme this year could be differentiation among the Magnificent 7, with some winners and some losers. It is easy to forget that these are seven very different companies. Therefore, the ability of each to monetize new revenue streams, such as artificial intelligence, could make the difference in staying on top or not.
Should Markets Be Concerned about Geopolitical Tensions? As unfortunate as it is that, in recent years, humanity has entered a new era of rising geopolitical tensions in various regions of the world, as a general rule, geopolitics is not a major driver of long-term returns. In fact, several analyses spanning the 30 major shocks since 1940 concluded that, yes, there is often short-term volatility in the day or two after the event occurs, but at three months, returns were positive 60% of the time. And at three years? That’s 90% of the time. For most investors, geopolitical events are disruptions, but they are generally not turning points. However, elevated geopolitical tensions suggest the need for some hedges, most notably gold and energy-related stocks, to protect against the risk of higher oil prices.
What Could an Electoral Rematch Mean for the Markets? So far, the Democratic and Republican primaries (Iowa, New Hampshire, and South Carolina) suggest a rematch between Joe Biden and former President Donald Trump. It is worth mentioning that these elections are of great relevance for domestic and foreign policy; however, statistics show somewhat scattered results, where the historical average return of the S&P 500 in an election year stands at 13.1% (excluding 2008, when the global financial crisis emerged). Therefore, investors should not base their investment decisions solely on this event but consider a broader analysis that encompasses other economic and financial factors.
Consensus expects sales of the Magnificent 7 to grow at a rate 4x (times) higher than that of the S&P 493.
*CAGR: Refers to compound annual growth rate.
Source: Goldman Sachs