“Path of Greatest Pain”
Investors have to prepare for this in 2024
By Daniel Saurenz
December 25, 2023, 6:13 p.m
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The prospects for the stock market at the end of 2022 were worse than ever. The result is new records for the DAX and a party for US technology stocks. Let’s see how enjoyable the coming year will be.
At the end of last year everything was a foregone conclusion for 2023. Interest rates have been way up, and of course that might not be good for Nasdaq tech stocks any more than it could be for gold or Bitcoin. Shortly before the turn of the year, the conclusion is that things turned out exactly differently. Twelve months ago, for the first time in ages, the majority of analysts at large banks were negative. You were wrong.
The mood was so bad at New Year’s Day 2023 “that a sharp decline of more than ten percent was expected for the first half of the year,” says Salah Eddine-Bouhmidi from broker IG. Now crisis prophets on the stock market are like clocks that have stopped. They are almost always wrong. They only show the correct time twice a day. The receipt followed in 2023 in that, apart from two smaller corrections in the DAX in March and October, there was hardly any setback that encouraged subsequent purchases. “The market usually takes the path of greatest pain,” says Stefan Riße from Acatis. This pain was at the top of the price chart in Europe as well as in the USA last year. In the meantime, prices have risen to new highs. The German stock index reached the 17,000 mark for the first time, although the more comparable price index is still a long way from the record and the SDAX and MDAX also have a lot of catching up potential.
Today, however, the starting position is different than at the end of 2022. “Almost 80 percent of the assets managed by professionals are invested in US stocks. This is a high value, but not yet extreme; with leverage instruments, 110 percent is also possible, as was the case at the beginning of 2021.” says Jürgen Molnar from broker RoboMarkets. A good half of investors see the S&P 500 higher in the next six months. There is still some room up to the rarely reached threshold of around 60 percent, but the risk-reward ratio has deteriorated significantly. The very low volatility sends similar signals. However, caution is advised here: in the ups and downs of the past two years, the fear barometer has proven to be a good compass. However, in strong upward phases such as from 2019 to 2020, the almost consistently low volatility was not a reliable counterindicator.
Interest rate cuts are not always positive
The question therefore arises as to whether the dream of the Goldilocks scenario (moderate growth, moderate inflation, low interest rates) could burst like a soap bubble and risks are not sufficiently priced in. Support can at least be expected from the central banks, whose monetary policy course ultimately has a strong influence on the direction. Fed Chairman Jerome Powell played Santa Claus at the December meeting and left nothing to be desired. “Three interest rate cuts by 2024 are nothing more than a 180-degree turnaround in US monetary policy,” says RoboMarkets analyst Molnar. The first adjustments could even come sooner than expected. “The Fed will not want to expose itself to the accusation of influencing the election outcome at the beginning of November with greater easing,” believes IG expert Bouhmidi. Nevertheless, the interest rate cuts of 150 basis points priced into the futures market are likely to prove too sporty.
Interest rate cuts are not necessarily positive for the stock market. “If the economy was in a recession, the S&P 500 was on average around 20 percent lower around ten months after the first easing. Without a recession, which was rare, it rose by five percent,” says expert Riße. So the music plays before the first easing, and the future is ultimately traded on the stock market. However, experts from the skeptic fund boutique point out that for some the Fed is already “behind the curve”. The concern is that they should have started cutting interest rates long ago.
The trees don’t grow into the sky
In return, the reallocation of capital from stocks to bonds is likely to be well advanced. Leverage securities on interest or treasuries have recently been a frequently traded asset class at Smartbroker. After 10-year interest rates fell to four percent, the relative valuation of the S&P 500 compared to bonds appears more attractive again. The only problem is one’s own historical comparison. Based on earnings estimates for the next twelve months, the P/E ratio is 19, well above the 10-year average. However, the popular rating metric only tells half the story. “Similar to the performance analysis, the big tech heavyweights distort the average significantly upwards. Without the giants, the US stock market is actually quite attractive,” says RoboMarkets.
But only if the companies deliver on the profit side. Growth of seven percent is expected for the first quarter of 2024, eleven percent in the second quarter, and the benchmark for the year as a whole is a sporty twelve percent. Artificial intelligence may noticeably change our future in a few years. But it is at least questionable whether the cash registers will be ringing in 2024, after Adobe recently failed to meet the high expectations of its artificial intelligence programs.
Of course, a look at the market technology should not be missed, especially the forecast quality of the cycle analysis was impressive for 2023. “Under certain conditions, pre-election years have a hit rate of 100 percent, and the stock market year that is coming to an end has impressively confirmed this,” says Franz-Georg Wenner from the Indexradar stock exchange service. US election years, on the other hand, often show inconsistent development in the first six months with a low point in May.
This also fits in well with the current rather optimistic mood. Apart from a dip in September, the second half of the year is largely positive. From a purely statistical perspective, the stock market is performing quite well, especially in the otherwise difficult summer months. The third quarter is by far the best in election years. The bottom line is that the probability of winning for the year as a whole is just under 75 percent.
Daniel Saurenz runs the stock market portal “Feingold Research”