Column: Four Reasons To Like The Market
[Written by Bryan Dooley]
So far this year, financial markets have demonstrated remarkable resilience. To date, the S&P 500 and the MSCI World Stock Index have posted gains of 7.28% and 6.12%, respectively, signaling a robust start.
However, with market indices recently touching new highs and the S&P 500 surpassing most Wall Street strategists’ 2024 year-end forecasts established in December, investors may be wondering whether the momentum can be sustained.
Assuming the global economy maintains its equilibrium, the outlook for further market appreciation appears favorable. This optimism is underpinned by four trends which suggest a positive trajectory for the foreseeable future.
Firstly, the era of stringent monetary policy by global central banks appears to be drawing to a close. Following an unprecedented rate hiking cycle from 2022 to 2023, the Federal Reserve has paused its interest rate increases since July last year.
Recent communications from the Fed hint at potential rate cuts as early as this summer, with futures markets indicating a greater than 50% likelihood of a reduction in rates by June. This shift could revitalize credit expansion and reverse the trend of capital moving from stocks and bonds into higher-yielding money market accounts, thus injecting liquidity into various asset classes.
Moreover, strides towards disinflation have likely helped propel market advances this year. Despite recent consumer price index [CPI] prints showing a modest uptick, the US personal consumption index [PCE] has steadily declined from a +5.47% year-over-year increase last September to the most recent print of +2.80% in January. The Fed uses the PCE index as its preferred measure of inflation and although the annual rate of increase exceeds its 2.0% target, the direction appears mostly favorable at this point.
As inflation rates decline, central banks should have more flexibility to relax monetary policies. Economists highlight the reduction in some key goods prices and the stabilization of rents as beneficial factors for the inflation landscape.
Another noteworthy aspect is the historical performance of equity markets during U.S. election cycles, particularly when an incumbent is seeking re-election. Despite the uncertainty surrounding the upcoming presidential race, historical data indicates that markets tend to perform well in such years. Since 1928, the market has consistently outperformed its average annual return during incumbent re-election years by nearly four percent.
The potential for market broadening presents an additional positive signal. Last year’s equity index performance was largely driven by a significant recovery in the shares of the seven largest U.S. companies by market capitalization, mainly within the technology and communications sectors.
However, a shift in leadership is underway, with the performance of these “Magnificent Seven” stocks beginning to diverge. This changing dynamic, evidenced by the recent outperformance of the equal-weighted S&P index compared to its market-weighted counterpart, indicates a healthier distribution of market gains across a broader array of companies.
Lastly, the rapid adoption and integration of Artificial Intelligence [AI] into various economic sectors promises to enhance productivity and profitability. The explosion in AI development, exemplified by the widespread adoption of platforms like Chat GPT, is poised to significantly impact economic productivity and corporate profit margins over the next decade.
While political and economic challenges will continue to cause volatility this year, the combined effects of moderating inflation, potential rate cuts, broader market participation, and the transformative impact of AI technology present reasons for optimism in the financial markets. As we navigate through these turbulent yet promising times, the “Roaring Twenties” market could very well maintain its upward trajectory.
- Bryan Dooley, CFA, is the Chief Investment Officer at LOM Asset Management Ltd in Bermuda. Please contact LOM at +1 441-292-5000 or visit www.lom.com for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.
