Seven Prevailing Topics Driving My Market Outlook Throughout 2024

2023 closed with a bang in the stock market. The S&P 500 was up 24% and the Nasdaq was up 54%. The majority of gains came from a strong end of the year rally.

56% of the gains by the S&P 500 were due to the rally in November and December.

tastylive

One of the big catalysts behind the rally was a bet by investors that the Fed will shift their interest rate policy from “higher for longer” to “lower and sooner”. Specifically a bet that the Federal Reserve will begin to cut interest rates in Q1 of 2024, and execute 5-6 total cuts in the year.

Including Interest Rate policy, I believe there are seven prevailing fundamental topics that will drive markets in 2024:

These seven topics will shape my fundamental thesis of the market.

Each week I’ll be looking for news events, data releases, and shifts in sentiments on these seven topics.

Inflation

The primary metric to monitor is the Personal Consumption Expenditures price index (PCE). Specifically core PCE, which excludes food and energy prices.

The Federal Reserve’s mandate is to achieve 2% inflation measured by a 12-month change in PCE.

The latest readings in PCE have been promising.

Across 12 months, core PCE inflation was still around 3.5% in October. But on a three-month annualized basis, it was just 2.4%. 

Wall Street Journal (December 2023)

PCE appears to have topped out in early 2022, and has been trending down.

The next PCE reading will be released on January 26th, 2024.

Labor Market

I’ll be monitoring five metrics to assess the health of the labor market: unemployment rate, unemployment claims, employment change, job openings, and average hourly earnings.

Along with inflation, these data points are important to gauge how the Federal Reserve may act on interest rate policy.

The latest readings for the five metrics were released during the first week of 2024:

  1. Job Openings (JOLTS)
    • Jan 3, 2024: 8.79M vs 8.84M forecast vs 8.85M previous
  2. Unemployment Claims
    • Jan 4, 2024: 202K vs 217K forecast vs 220K previous
  3. Average Hourly Earnings (m/m)
    • Jan 5, 2024: 0.4% vs 0.3% forecast vs 0.4% previous
  4. Employment Change
    • Jan 5, 2024: 216K vs 168K forecast vs 173K previous
  5. Unemployment Rate
    • Jan 5, 2024: 3.7% vs 3.8% forecast vs 3.7% previous

The labor market has also remained surprisingly strong, with the unemployment rate still near five-decade lows. But it has been cooling exactly how the Fed wants: Job openings are declining, and fewer people are quitting, which should help keep wage growth in check.

Wall Street Journal (December 2023)

The data shows a resilient labor market in 2023, despite historically aggressive interest rate increases:

“It’s a labor market that showed substantial resilience while cooling to levels that were much more acceptable from the Fed’s perspective,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “It was about as good of an outcome for the labor market as you could have hoped for in 2023.”

Wall Street Journal

Forecasters expect a continued cooling in wage growth and a drawdown of pandemic-era savings to cause consumers to pull back on spending in 2024. That, in turn, could slow the labor market and economic growth overall. Fed policymakers, for example, expect the jobless rate to rise to 4.1% by the fourth quarter and the economy to grow at a slower rate this year compared with the year before.

Wall Street Journal

Interest Rate Policy

Inflation and the health of the labor market are two key inputs used by the Federal Reserve to set the target interest rate.

At the end of 2023, the consensus on Wall Street was cuts in Q1 and multiple cuts throughout 2023.

Behind the dramatic turn in attitude is a growing belief among investors that the Federal Reserve’s campaign to fight inflation is winding down, ending the interest-rate hikes that buffeted markets in recent years. Many now expect the central bank will likely next cut rates instead, shifting market dynamics in ways that seemed unlikely just months ago.

Wall Street Journal

However, according to the December 2023 Fed minutes released this week, Fed officials have not reached consensus for multiple cuts in 2024.

While nearly all officials anticipated policy rates would eventually be lowered before the end of this year, the written account of the Dec. 12-13 meeting, released Wednesday, underscored heightened uncertainty over how to navigate the next interval of monetary policy after the most rapid increase in interest rates in four decades.

Wall Street Journal (Jan 3 2024)

Federal Reserve officials have signaled they are comfortable for now maintaining their benchmark federal-funds rate at a 23-year high as they await more evidence that inflation is falling back to their 2% target. At their meeting last month, most officials penciled in at least three rate cuts this year, a sign the central bank is done lifting rates.

Wall Street Journal

The next FOMC statement and press conference is scheduled for January 31st.

A fundamental question to consider is why would the Fed start to cut rates? What would be the catalyst?

I’ve been revisiting this podcast with David Rosenberg where he asked that same question:

The question then becomes why would they start to cut rates? It’s because the lags kick in and we get a recession, the recession crushes inflation. The Fed will see inflation going down, unemployment going up, all the thing they have wanted all along.

David Rosenberg

This week, Steve Eisman, a senior portfolio manager (of Big Short fame) presented a contrarian view on interest rate cuts. He doesn’t foresee aggressive interest rate cuts in 2024.

I think the expectation that the Fed will cut rates three times, is wrong, or is too aggressive at this point. I’d say one rate cut, unless there is a recession. If there is no recession, I don’t see a reason why the Fed needs to be aggressive in cutting rates.

Steve Eisman on CNBC

I think even if inflation does come in, if I’m the Fed and I’m looking at the Volcker lesson, I say to myself, what’s my rush? Inflation has come in, I can always cut rates tomorrow if things get weak, but if the economy is flying and inflation has come in, why don’t I keep rates here?

Steve Eisman on CNBC

The Magnificent Seven

The day to day price movements of the Magnificent Seven (Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Tesla, Meta) drive markets.

The Magnificent Seven stocks have swelled to represent about 30% of the S&P 500’s market value, according to Goldman Sachs Global Investment Research. That is approaching the highest-ever share for any seven stocks.

Wall Street Journal (Dec 17 2023)

Investors and strategists have long raised concerns about market concentration. When just a handful of stocks are responsible for most of the market’s gains, it becomes more vulnerable to a downturn if a few heavyweights fall. 

Wall Street Journal (Dec 17 2023)

After ending 2022 down 40%, they roared back in 2023 with a cumulative return over 70%. 2023 ended with Apple, Microsoft and Nvidia at all time highs. Google and Meta moving toward all time highs. Leaving Amazon and Tesla as the “laggards”.

I’ll be monitoring news headlines from the Magnificent Seven companies on topics such as earnings, AI innovations, and hiring/layoff events.

This week Apple made headlines with multiple downgrades from analysts. The stock was down -3.19% after the first trading week of the year.

Artificial Intelligence

With the release of ChatGPT, OpenAI made generative AI mainstream in 2023.

The promise of future efficiencies and earnings from generative AI technology was a major driver in the bull run of the The Magnificent Seven and other technology companies.

Will the promising vision of what a generative AI future can bring be enough to push even further gains in 2024? Will investors be presented tangible evidence (e.g. earnings or revenue growth) as a result of generative AI technologies being widely adopted by enterprise companies and consumers?

Some customers are apprehensive about AI. “Our customers have been concerned for more than a year about the highly dynamic nature of the generative AI market—including rapidly-changing functionality, policies, pricing models, and now, management structures,” Jain said. “Everything in this space is changing rapidly and to some extent, everyone is concerned about betting on the wrong horse.” 

Wall Street Journal (Dec 6 2023)

Data is the key ingredient for the models that power generative AI. I’m monitoring the copyright infringement lawsuit between The New York Times, Microsoft, and OpenAI. How will this lawsuit impact the relationship between publishers and technology companies building AI models?

The largest of the Magnificent Seven, Apple, is the only company from the group that didn’t make any AI mania headlines in 2023. Is Apple working behind the scenes on exclusive deals with publishers for access to their content to train their AI models? An AI product or strategy announcement from Apple could be a market driver.

Earnings Releases

Earnings releases provide insights on the health of businesses. If companies continue to present stable or growing earnings, the less likely the US will experience a recession, and the more likely the Federal Reserve will navigate us to an elusive soft landing.

Earnings releases also provide insights on the health of the economy and the consumer.

Bank earnings this Friday (Jan 12) will give us a first glimpse at the health of the economy and consumer. JP Morgan, Bank of America, Wells Fargo, Citi, and BNY Mellon will all be releasing results.

2024 Election

The 2024 Election may be an interesting catalyst for markets in the second half of the year.

These are some of the initial questions that I’m monitoring:

  1. Will Donald Trump be barred from the ballot in multiple states?
  2. How will the legal cases against Donald Trump play out?
  3. Who will be the Democrat and Republican Presidential nominees?
  4. Will a viable third party candidate(s) be on the ballot?
  5. What are possible market implications if Joe Biden wins?
  6. What are possible market implications if Donald Trump wins?
  7. Which party will control the House and the Senate?

On the latest news front, the Supreme Court has agreed to hear Donald Trump’s appeal of Colorado’s ruling.

The Supreme Court agreed to hear former President Donald Trump’s appeal of Colorado’s landmark ruling that he is an insurrectionist and unfit for public office.

The court set an expedited schedule for the case, with oral argument on Feb. 8. A decision could come within days or weeks of the arguments.

Trump, the front-runner for the Republican Party nomination, was recently barred from the ballot in Maine on those grounds, raising pressure on the Supreme Court to weigh in and clarify his eligibility.

Wall Street Journal (Jan 5, 2024)