2024 look ahead: a recovery reaching MATURITY?

Last year we asked whether 2023 would be a time for REFLECTION, noting the factors of Recession/Earnings/Federal Reserve/Loan loss provisions/ESG/Consumer/ Total returns/Inflation and interest rates/Online and Nasdaq.

And, indeed this turned out to be the case in a year dominated by inflation and interest rate expectations, a move towards strong growth shares such as mega-cap technology stocks in the US and recessions which did not materialise.

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Indeed, the year is heading towards a more positive end as interest rate estimates are anchored and the possibility of a soft landing in the US seemingly increases.

At the time of writing, the Dow Jones Industrial Average in the US has risen by 9.2% in the year to date, the S&P 500 by 19% and the Nasdaq by 36%.

In the UK meanwhile, the FTSE 100 has added just 0.2%, while the more domestically focused FTSE 250 is down 2.3% during the year.

This year we ask, in our annual acronym – in 2024, will any market recovery reach MATURITY or could there be even further to go?

M&A

AI

Turbulence

UK market

Recession

Inflation

Technology’s “Magnificent Seven”

Yields

These factors are the most likely to influence investors and are as follows -

M&A

Merger and acquisition activity has been in the doldrums amid market volatility, but there are some signs this could change next year.

In particular, a stabilisation of interest rates and a great deal of pent-up demand could see sovereign wealth funds, private equity or larger corporates reaching for their chequebooks.

Similar to the boost which the pharmaceutical industry gave to M&A in acquiring small specialist companies rather than pursuing their own massive Research & Development units some years ago, next year could be a year for AI. Companies wishing for a quick route to AI exposure and without their own in-house development skills could well decide to snap up existing AI products and experts.

AI

This has been the buzzword of the year in investment terms and its potential applications across most walks of life are likely to keep the frenzy alive.

The speed at which it is developing, and the potential for large profit resulting from this, could mark the beginning of a new technology revolution.

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It will also need to navigate the hurdles which will come its way, such as job losses, governments, regulation and restriction.

In any event, it will remain a dominant theme for investors.

Turbulence

Perhaps one thing that can be guaranteed in any given year is market turbulence.

At first glance, next year promises to be no different, with geopolitical concerns such as between Russian/Ukraine and in Israel, as well as ongoing and simmering tensions between the US and China.

Earnings expectations in plain sight.

In addition, earnings upgrades or downgrades to companies, unexpected economic shocks or actions by central banks and elections in the US and UK will all add to the mix..

UK market

UK shares have been on the naughty step with international investors for some time now, initially prompted by the Brexit referendum and subsequently snubbed as the hunt for growth intensified.

Record highs recorded in February for the premier index were totally erased as investors sought growth elsewhere.

Indeed, the constituents of the FTSE 100 may have a large exposure to overseas earnings, but this has cut little ice on the basis that many of the companies are ex-growth, even if they are stable, consistent and profitable.

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On a valuations basis, the UK trades at around half of that given to the US (and indeed most of the developed world).

Many are agreed that the UK market is overdue a rerating. Quite when that might happen remains entirely unclear.

Recession

The Holy Grail for investors this year has been whether the Federal Reserve can engineer a soft landing in the US, whereby economic growth holds up despite the nullifying effect of an aggressive interest rate-hiking policy.

The current optimism that this will play out next year has been a pillar of recent market strength and will certainly be a major factor in establishing sentiment.

In the UK, the situation is more problematic, with a recent dip in consumer discretionary spending as a result of cost-of-living pressures a concerning trend. Meanwhile, inflation (and indeed interest rates) remain elevated which, set against anaemic economic growth, could yet tip the UK into recessionary territory.

Inflation

At different times this year, inflation and the need to increase interest rates in order to bring it under control has been something of a drag on both market performance and sentiment.

The latest data suggests that some battles have been won, but not the war. There is also the possibility that the “final yard” between inflation at, say 3% and a 2% target, could be the most difficult.

A cooling labour market and falling cost-of-living costs would help, as would stabilising energy prices. In the meantime, the Fed’s current mantra of “higher for longer” is an example of central banks’ determination to reduce the headline figure once and for all back to target rates.

Technology’s ‘Magnificent Seven’

The so-called “Magnificent Seven” stocks in the US - Apple Inc (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN), Alphabet Inc Class A (NASDAQ:GOOGL), NVIDIA Corp (NASDAQ:NVDA), Meta Platforms Inc Class A (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT) and Tesla Inc (NASDAQ:TSLA)– have had a positive but disproportionate impact on market performance this year.

It is estimated that they represent 29% of the S&P 500 by market capitalisation, a dominant position. In addition, Goldman Sachs have shown that these handful of stocks have gained 71% this year, while the remaining other 493 companies have added just 6% - an astonishing revelation.

But can it continue?

As mentioned above, the potential applications (and profitability) of AI certainly lit a fire under technology stocks this year, and the Magnificent Seven in particular. But AI is not the only game in town.

We are seeing swift and huge innovation in many other areas, ranging from augmented reality (AR) to 6G technology which should revolutionise network communications – and plenty in between.

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Personalised healthcare and treatment based on DNA data is no longer a distant dream, while developments in nanotechnology are finding new applications across a host of industries.

Innovation will continue to advance apace and many of the larger tech firms in particular seem well placed to benefit. Indeed, and as we mentioned this time last year, “it may also be fair to say that investors ignore the tech giants at their peril, since there is plenty of scope for further growth.”

Yields

Bond yields, which provide an important pointer to borrowing rates, have been elevated for most of this year in the face of heightened interest rate expectations.

The situation should now hopefully have stabilised, as evidence by a recent dip in yields.

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In any event, given the inverse relationship between bond prices and yields, there is the possibility for both capital gains as well as an attractive level of interest.

They would also likely become the target of buying interest should any economic shocks arise, with investors comforted by the safety of government bonds such as US Treasuries and UK gilts.

Dividend yields will also continue be a theme for income-seeking investors in particular. On average, the FTSE 100 currently yields 3.9% and while dividends can never be guaranteed, prospects are high that such yields can be maintained given the strength of the underlying constituents.”