T he stock market ended 2023 on a positive note and is poised to have another year of gains as investors look to the Federal Reserve to start cutting interest rates in the coming months.
A lot has changed in just the past few months to arrive at that happy situation. While the Fed was once signaling rates would be higher for longer, part of a post-COVID-19 pandemic strategy to tame inflation, investors are now pricing in up to six rate cuts over the next year. And Fed officials are taking on a little more dovish tone. That is because recent inflation reports have shown meaningful declines, good news for the economy, and a nice turn for the markets .
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The S&P 500 is now up more than 5% in just the past month alone and rose 25% since the start of the year. The Dow Jones Industrial Average has bounced 6.5% in the past month, while the tech-heavy Nasdaq is up a whopping 45.5% from the start of 2023.
Quincy Krosby, chief global strategist for LPL Financial, said that the most recent consumer price index report, which showed inflation running at a cooler 3.1% pace, helped underpin and confirm that prices were coming down at a faster clip. That is hopeful for investors eager for rate cuts.
“Not at the point that the Fed could declare victory, but that it is moving in the right direction,” she told the .
Krosby explained that this latest rally in the markets is better news because it’s more broad-based. She pointed out that it isn’t just a handful of major companies leading the indices higher, but rather small- and mid-cap stocks have also climbed. Notably, the Russell 2000 has popped nearly 15% in the past month alone.
“The Russell 2000 is a barometer for economic conditions at the most granular level,” she said. “It sends a positive signal.”
Krosby said that U.S. markets should end up having a decent year. That is because, historically speaking, when there is a strong year for the stock market, as 2023 was, the following year tends to end as a positive one.
“When all is said and done, the market seems to focus on what the Fed is going to do and the expectations are that the Fed will deliver rate cuts,” Krosby said. “It may not be as early as the market suggests … but at some point, the market expects that there will be rate cuts.”
A recent report from John Lynch, chief investment officer for Comerica Wealth Management, predicts that the S&P 500 will end up being around the level it is at now when 2024 comes to a close.
“Fortunately, corporate profits are set to gain traction as we expect market growth to reflect earnings gains. Our base case scenario has the S&P Index fairly valued in the 4,750 range by year-end 2024,” a summary of the report said.
Rodney Lake, vice dean for undergraduate programs at George Washington University and director of the university’s Investment Institute, told the that the perception of these coming rate cuts bodes well for the stock market. He expressed optimism for the year ahead.
“Many people are expecting that rate cuts are coming, that very likely will continue to lift stocks higher and for our outlook at the GWU Investment Institute, is that the market will move higher in 2024 on a total return basis,” Lake said.
Lake said there are also uncertainties surrounding the wars in Ukraine and the Gaza Strip. If those become broader conflicts involving more actors, it would have the potential to weigh on the equity market, Lake said.
But Lake said that outside of the wars broadening, the most significant obstacle for the stock market next year might be if declining inflation suddenly reverses course and begins to move higher. That could cause the Fed to not cut rates and could cause investors to become spooked.
“In the worst-case scenario, that would get so bad that the market would have to start pricing in higher for longer and potentially an increase,” Lake said. “I think the probability of that is quite low at this point given where inflation has been trending … but I would say that inflation turning around and being higher than expected is probably the most significant thing that could derail a positive outlook for 2024.”
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Thomas Mathews, a finance professor at Florida Gulf Coast University, told the that he sees four main drivers for stock performance this coming year: the overall economic performance of the U.S., the Fed’s monetary policy, price momentum, and the U.S. presidential election.
Mathews said he expects single-digit gains for the stock market next year and, at worst, says the market would only end up down by a percentage point or two.
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