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“It is no exaggeration to say that financial markets started 2024 with a mild hangover,” Jonas Goltermann, deputy chief market economist at Capital Economics, said in a note Wednesday. Indeed, as normal life resumes in 2024, the stock market’s early returns are sounding different than the surge of 2023. The tech-heavy Nasdaq Composite Index has fared worst, falling more than 1.5% in the first two days of trading. It rose this year after surging nearly 40% in 2023.
Goltermann cautioned against “reading too much into” the stock’s performance in the first few trading days of the new year, but considered “plausible explanations” for the decline and “what that might imply for the year ahead.” He argued that it makes sense.
The economist highlighted three main reasons why stocks are experiencing a slight misstep in what seemed like an inevitable and imminent rally to all-time highs a few days ago. While some of Mr. Goltermann’s reasons are innocuous, others could have serious long-term consequences for the global economy and markets.
1. Consolidation happens naturally after big gains.
Let’s start with the benign ones. Simply put, stocks do not move in a straight line. Even when the economy is strong and all the conditions are right for stock prices to rise, there are always going to be down days.
But in the final months of 2023, stocks bucked that trend with an incredible run. The S&P 500 rose for nine straight weeks through the end of 2023, its longest streak of gains in 34 years. So why do stock prices fall in the new year?
“The first and simplest explanation is that after the strong rally in most asset classes during the last two months of 2023, there is likely to be a period of consolidation or correction at some point.” Golterman explained.
Jay Hatfield, founder and CEO of Infrastructure Capital Management, said trader sentiment and the tax benefits of taking profits in the new year are likely to play a role in the ongoing period of market consolidation. It was pointed out that it was having an impact on “There was a big run-up, so everyone made a lot of money. So they’re all saying, ‘The market looks kind of weak, so why don’t we make a little profit?’
Despite the recent economic downturn, Hatfield said his bullish outlook for the stock “remains unchanged,” including his year-end price target of $5,500 for the S&P 500. In his view, the recent poor performance is just a “normal” period of economic recovery after last year’s surge and is not a sign of worse things to come.
2. Concerns about the central bank’s “less favorable” outlook
But there may also be less benign reasons behind the current stock market downturn. Capital Economics’ Golterman worries that investors who celebrated the end of the Fed’s interest rate hike campaign in December may have been surprised by more hawkish statements from Fed officials this week. “Policymakers have been trying to push back on the perception that a rate cut is imminent,” Golterman wrote, pointing to recent comments from Richmond Fed President Thomas Barkin.
Barkin said in a speech Wednesday at the Raleigh Chamber of Commerce that while a “soft landing” is likely at this point, Fed officials could raise rates further in the coming months if inflation remains an issue. said. “Perhaps that message is starting to loosen the ice,” Golterman wrote, noting that some investors may see less rate cuts this year than previously expected, weighing on stock prices. He indicated that he thought it would be.
Still, the idea that the Fed will raise rates is “highly unlikely,” according to Capital Economics. “We believe the Fed and most other major central banks will begin lowering interest rates soon,” Goltermann said.
He noted that Federal Open Market Committee (FOMC) minutes released Wednesday show that Fed officials believe they have made significant progress in controlling inflation and expect to cut interest rates. This suggests that there is still no agreement on the timing or depth of rate cuts. interest rate reduction. The minutes said there was an “unusually high degree of uncertainty” regarding the path of policy interest rates, and some investors remained concerned.
Jefferies senior economist Thomas Simmons said in a note Wednesday that the FOMC minutes were “much more hawkish” than Fed Chairman Jerome Powell’s December press conference, adding that “the language was more dovish. He claimed that the words were often “distorted” to avoid “.
3. Red Sea shipping disruptions raise inflation concerns
Finally, tensions in the Middle East remain high as Israel continues its bombing campaign in Gaza. Houthi militants attacked a cargo ship in the Red Sea, a critical crossroads for global supply chains. About 15% of the world’s shipping traffic passes through the Red Sea each year, including oil tankers and container ships transporting everything from semiconductors to grain.
As tensions escalated over the weekend, US Navy helicopters destroyed three Houthi ships after attacking a transport ship. Iran responded by sending warships.
Shipping giants such as Maersk and Mediterranean Shipping Company (MSC) have also suspended operations in the Red Sea, forcing many container ships to detour around South Africa to deliver cargo to the West. The fear is that rising shipping costs and supply chain problems caused by the Red Sea crisis could lead to another spike in inflation, but Goltermann of Capital Economics said that was unlikely. The real risk is that the war between Israel and Hamas “escalates into a broader regional conflict.”
“Such developments could have a more severe impact on the global economic outlook, including the possibility of further spikes in energy prices that could push back the timing of monetary easing, with most asset prices It may have a negative impact.”
Despite rising tensions in the Middle East, Goltermann is not concerned about further escalation of conflict between oil-producing countries. Nor is the threat of higher-than-expected interest rates this year enough to change his bullish outlook on stocks.
“Overall, we think the overall picture remains constructive for both bonds and equities,” he concluded. “While there is potential for further disruption in the short term, we believe a shift towards more accommodative monetary policy will be a key theme in 2024.”
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