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While most forecasters were pessimistic about the U.S. economy and stock market in 2023, Ed Yardeni was decidedly bullish. The veteran investment strategist and founder of Yardeni Research said slowing inflation, a stable labor market, solid earnings and the introduction of new technologies, including AI, helped the S&P 500 index rise more than 18% to 4,600 last year. I argued that it would happen.
It was an optimistic, out-of-consensus outlook, but far-sighted and a bit too bearish. The S&P 500 Index rose more than 24% in 2023 to 4,769, surprising Wall Street, while the tech-heavy Nasdaq Composite Index rose 43% to 15,011.
But now Yardeni warns that the first half of this year may not be so good for stock market investors. He still believes the U.S. is on track for the “Roaring 2020s,” a time when technological innovations from AI to robotics will improve worker productivity, reduce business costs and usher in an era of relative affluence. We believe that there are four clear and present dangers: ”, and stock prices are likely to be suppressed in the short term.
“After the S&P 500 stalled in the first half of this year, I wouldn’t be surprised if it recovers to $5,400 by the end of the year,” Yardeni said in a note Wednesday.
Hawkish Fed
Investors who predicted an aggressive rate cut in 2024 late last year may have been too optimistic. The Fed’s December economic outlook summary predicted three cuts of 25 basis points in 2024, but many investors were focused on five cuts.
Essentially, as Yardeni explained on Wednesday, “the rally in stocks and bonds since late October may have discounted easy monetary policy this year over what Fed officials are likely to deliver. “I’m saying that.
Yardeni said the discrepancy in interest rate forecasts between investors and the Fed could cause central bank officials to “start the new year by lowering their rate cut expectations.” Additionally, any sign that the Fed won’t cut interest rates significantly in 2024 is sure to weigh on stock prices, as investors are hoping for a reprieve from rising borrowing costs for a while.
There is already some evidence of this trend, with Richmond Fed President Thomas Barkin saying in a speech at the Raleigh Chamber of Commerce that “the possibility of further rate hikes remains on the table.”
“Partisan paralysis” and the rapidly increasing federal budget deficit
Traffic congestion in Washington is another “clear and present danger” Yardeni is monitoring. Lawmakers need to agree on spending targets for 2024 in the coming weeks, but Yardeni said there will be “fewer and fewer issues on which Republicans and Democrats can agree” and “even partisan paralysis within the two parties.” ” he pointed out. That could lead to more spending and debt limit fights in Washington this month, weighing on stocks.
Yardeni said that while Washington remains powerless, he will closely track the “federal deficit ballooning due to soaring interest payments on the federal debt.”
The nation’s debt has soared to $34 trillion due to increased federal spending in recent years, and Yardeni has long warned that “bond vigilantes” could take action if the debt grows too high. . The idea is that bond buyers will be reluctant to buy U.S. government bonds unless they are offered more interest to compensate for the increased risk. This leads to higher bond yields, which is usually negative for stocks.
war in the middle east
While the war between Israel and Hamas has not yet had a negative impact on stock market returns, it could do just that if the conflict continues to escalate. “The war in Gaza appears to be turning into a regional war,” Yardeni said after Houthi militants attacked a cargo ship in the Red Sea, the U.S. military responded, and Iran sent warships to the region. Ta.
The Red Sea is a key chokepoint for global trade, and attacks on the region are causing supply chain problems that could worsen inflation. Rising inflation could force the Fed to hold off on cutting interest rates, potentially weighing on stock prices. The good news for now is that most goods and commodities, especially oil, have not been dramatically affected.
“Conflicts and rising tensions in the Middle East have not affected oil prices, which have been depressed since last fall,” Yardeni said. “Supply remains plentiful, but demand remains weak in China and Europe, both of which are in recession.”
China and Taiwan
Finally, Yardeni is concerned that China’s weak economic growth could hinder stock performance in the interconnected global economy this year. He said the country’s manufacturing sector was struggling and there were “signs of deflation and pressure on corporate profits” that could weigh on global economic growth and slow the rise in corporate profits.
China’s ambition to invade Taiwan could also hurt stock market returns, but a positive development is that China’s economic problems could deter an impending invasion.
“Due to the economic downturn, the Chinese government will postpone its plans to invade Taiwan,” Yardeni wrote. “Despite this, Chinese President Xi Jinping on Sunday pledged the ‘unification’ of China and Taiwan in his year-end speech, weeks before the autonomous island holds presidential and legislative elections.”
There are clearly many risks looming over stocks, but overall, Yardeni believes the U.S. economy will continue to prosper over the next decade, and stocks will grow with it.
Stocks continued to rise during the Roaring 2020s, a “tumultuous decade so far” marked by a pandemic, severe inflation and multiple wars. “In four dangerous years, the S&P 500 index rose 47.6% from the end of 2019 to the end of 2023,” Yardeni noted, adding that his “mantra” is now “There’s nothing to be afraid of; ”, he added.
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