Asset Management
01/02/2024 Market Strategy
January 02, 2024
Will 2023 Prove Prelude to Further Gains in Equities in 2024?
The outlook looks promising for the bull market to continue to run
Key Takeaways
- In a holiday-abridged week traders and investors will focus on a heavy tranche of economic data including the nonfarm payrolls report and ISM reports for the first measures of economic activity in December.
- As we start the week, we note that the S&P 500 ended last week just 0.5% away from its previous all-time high recorded on Jan. 3, 2022. A close above the prior high could provide a boost in sentiment that could move stocks higher near-term.
- Our expectations are for the market to remain data-dependent until Q4 earnings season begins on Jan. 12 when the big banks start reporting results.
- P/E multiples of mid and small cap indexes have expanded markedly since October and are now near their five-year averages. This illustrates the broadening of the rally in equities since October 2023.
US stocks in our view paused to take a breather last Friday midst their longest weekly advance since 2004 and just 0.5% away from a new record high for the S&P 500. Considering the powerful rally that stocks stateside have had from a low since October 27 it should come as no surprise that traders and investors needed to take opportunity to assess a move from the October low through last Friday. It’s not uncommon for markets to pause to digest a bull run of the magnitude experienced in the fourth quarter just ended.
In fact it would appear to us to make good sense for markets to pause considering the run-up in stock prices that saw the Dow Jones Industrial Average, the S&P 500, the NASDAQ Composite, the S&P 400 (mid-caps), the S&P 600 (small-caps) and the Russell 2000 respectively rally in price: 16.26%, 15.85%, 18.73%, 19.54%, 23.34% and 23.83% from October 27 through last Friday December 29.
A substantial rally in bond prices, favorable comments by Fed officials and the Fed’s chairman since the December FOMC meeting along with a markedly better than expected Q3 S&P 500 earnings season helped overcome the negative sentiment that had dogged the markets since 2022.
Our expectations are for further upside in stock prices this year supported by the improvements in fundamentals which helped get the markets out of the funk they’d been driven to in 2022.
Economic data throughout last year was persistent in our view in pointing out improving fundamentals and showing progress in the Fed’s efforts in bringing down the pace of inflation while showing uncanny sensitivity as to the potential effects of its current rate hike cycle on the economy in a manner that has thus far avoided a recession.
As a result of these developments traders and investors have been able to look beyond monetary policy uncertainty, recession worries, domestic political dysfunction and elevated geopolitical risks.
2023 began with bears and their negative outlooks apparently in control only to end the year with what seemed serial bear capitulation on back of the degree of success the Fed has achieved in bringing down the pace of inflation (evidenced in economic data) along with the resilience shown by business, consumers and labor to manage a process of an interest rate hike cycle and a transition into the next new normal.
So where do we go from here?
Our expectations are for further upside in stock prices this year supported by the aforementioned fundamental improvements which helped get the markets out of the funk they’d been driven to in 2022. That said 2024 will of course be its own year with issues carried over from last year mixed in with the challenges that are developing as the calendar turns the page.
Over the course of the last week an escalation of the hostilities in the Middle East has challenged the flow of commodities and goods through the Suez Canal which could have a negative effect on imports and exports if not effectively addressed. North Korea and Russia have fired rockets in separate zones suggesting a geopolitical situation that could worsen.
History, anecdotal evidence, life in general and experience in the markets tell us: “It’s never easy.” There’s always uncertainty and trouble but often cooler heads prevail and things indeed usually get worked out.
We remain positive on the markets with an overweight in equities favoring cyclical over defensive sectors, prudent diversification across market capitalizations with exposure to “growthier” value and “GARPier” growth stocks.
Prudent diversification, right-sized expectations and the knowledge that trees don’t grow to the sky remain key along with the reminder that past performance is of course no guarantee of future results.
Happy New Year!
Name:
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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