Harry Geels: What will 2024 bring?

January 9, 2024

By Harry Geels

It is part of the folklore of financial markets to look back on the old year in January and look ahead to the new. In any case, the year 2024 will yield five interesting developments, which on average are positive.

Last week we looked back on the previous year based on a personal selection of five important developments. This time we do something similar by analyzing five important developments of the new year. We conclude with an overall forecast, supplemented with a number of comments about forecasts in general.

1) Election year in many countries

This year, almost half of the world's population will vote, which can mainly be attributed to three major democracies: the US, India and Indonesia. Elections can have a significant impact on the performance of the stock markets of the countries concerned. We saw this last year in Argentina, where the stock market shot up the year that libertarian president Javier Milei was elected. The Greek stock market also did well in the year of the victory of the center-right New Democracy.

This year, the world will be watching the American elections in particular with suspicion. It promises to be another bizarre battle between two elderly white gentlemen. Wall Street favors Joe Biden. And not because of his charisma or political plans, but more because Donald Trump seems an even more unguided projective than Biden. And because Trump thinks less positively about mega-large companies in general and pharma and banks in particular. Wall Street seems to be getting its ducks in a row. Left-right thinking is outdated anyway.

Figure 1: The 4-year cycle on the American stock markets

Source: CFA

The American elections are also likely to have a positive impact on the stock markets. Firstly, the quantitative rule applies that the election year (the fourth year of the presidential cycle) is usually a good stock market year. The average return is 7.5%. The third year (i.e. last year) is usually the best investment year. The fourth year is usually good because the incumbent president does not want a stock market crash just before the elections. He will placate investors by providing fiscal and (if possible due to the high national debt) also monetary support.

2) Interest rate cuts at last

In its last interest rate decision at the end of last year, the Fed decided to leave interest rates unchanged for the third time in a row. Jerome Powell also indicated that rates are likely at or near their peak for this tightening cycle. The market is expecting three interest rate cuts this year. While the consensus in September last year was still at a policy interest rate of 5.1% at the end of 2024, this has now been lowered to 4.6%. At the end of 2025, the policy interest rate would even be 3.6%. Lower interest rates are good for the stock markets and should help the incumbent president.

Figure 2: Reduced expected Fed policy rates for 2024 and 2025

3) Soft landing, profits broadly up again

Economic growth has stagnated to around zero in most countries. That is remarkably positive. Due to the sharp rise in interest rates in the past two years, the economy could also have ended in a recession. Consumers have continued to spend. Initially due to tax incentives during the corona crisis, but in the last year also due to wages that have partly increased in line with inflation. And while the industry is struggling, the IT sector continues to invest (thanks to AI, see point 4). Average corporate America profits are expected to continue growing.

Figure 3: Consensus earnings expectations for the S&P500 companies

4) The Fourth Industrial Revolution is now fully underway

The fact that last year was a good investment year probably had not only to do with the presidential cycle, but also with a new stock market hype: that of AI. It is generally stated that we have recently entered the fourth Industrial Revolution. The first concerned the developments that took place after the invention of the steam engine, the second mass production, the third automation with computers and the fourth concerns robotization, the 'internet of things' and AI. We are only at the beginning of this revolution, which will happen in fits and starts.

Figure 4: The Fourth Industrial Revolution has started

5) Geopolitical conflicts are regional

Experience shows that many investors are always concerned about what is happening in the world. Unfortunately, too much geopolitical myopia often results in wrong entry and exit points and too low risk attitudes, which means missing out on returns in the long term. In the long term, geopolitical conflicts hardly play a role. At most, they cause temporary ripples in the stock exchange pond. That being said, both the perception of geopolitical risk and the attention of the business community for geopolitics are now historically high - despite a decline last year.

Figure 5: The geopolitical risk indicator (red line) versus the business community's attention to geopolitics (purple line)

Conclusion

All things considered, there are few reasons to expect a bad year for the stock market. On the contrary, there are reasons to be (cautiously) positive. Our financial system is unstable and risky, because it is built on a lot of leverage (debt), which makes it sensitive to interest rate movements. In addition, the world is also geopolitically unstable (see point 5). By definition, predictions always come with margin of error. My colleague Han Dieperink is now talking about the entry point of the century.

This article contains a personal opinion from Harry Geels

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