2023-12-20 11:37:06
All three major indexes are headed for gains in December and for all of 2023, as stocks build on recent gains and investors look forward to interest rate cuts from the Federal Reserve in the new year.
The S&P 500 is up 4.4 percent this month and 24.2 percent year to date, while the Dow Jones has added 4.5 percent and 13.3 percent, respectively. The Nasdaq is up 5.5 percent for December and 43.4 percent for 2023, putting it on track for its best year since 2020.
To what extent can American indices maintain these levels next year, in light of the current economic expectations, and with the markets anticipating the presidential elections?
Positive movements
Ahmed Azzam, senior financial markets analyst at Equity Group, said in exclusive statements to “Eqtisad Sky News Arabia” website:
- It can be said that stock movements in the recent period – specifically in the fourth quarter of this year – were positive. Especially under pressure from positive investor sentiment for stock movements; Given the markets’ expectations of the possibility of reducing interest rates in 2024, with the change in the Federal Reserve’s tone in its last meeting regarding its trend towards lowering rates.
- Also, the rush of the markets and the formation of these positive sentiments comes especially in December before the elections, which is usually the best performance historically.
- On the other hand, there is a group of factors that supported this trend, following the Federal Reserve’s decision and its talk regarding it to reduce interest rates, as well as the arrival of ten-year US Treasury bond yields to less than 4 percent levels, and the decline in mortgage rates by less than 7 percent, in addition to the decline in interest rates. Oil fell by nearly 24 percent from the peak (which was $95 in September) to $71, in addition to the decline in fuel prices in the United States in November.
A boost for US stocks
Azzam points out that all of these factors gave a good impetus for American stocks to record record highs, stressing that reducing interest is considered a somewhat positive thing for stock performance, especially since when borrowing costs are lower, it gives greater profitability to companies, as well as greater demand, which is This gives a positive impetus to the growth of these companies’ profits.
The Federal Reserve kept interest rates unchanged at its last meeting in 2023, and indicated that the historical tightening of monetary policy over the past two years may have come to an end and that interest rates will begin to decline in 2024.
Azzam pointed out that these factors support positive expectations regarding the performance of US indices. For example, expectations indicate an increase in the gains of the Standard & Poor’s 500 by 12 percent (an increase from previous expectations of around 8 percent).
He continues: “Lowering interest rates would at least give a boost to expectations of higher profit growth in American indices,” citing also the record performance achieved by the Down Jones Industrial Average and the levels that the Nasdaq recently breached.
Small businesses
What is striking in this context – according to Azzam – is the positive performance of the “Russell” index, which is the index of small companies, which recorded unprecedented numbers for 54 weeks, in light of rapid increases, considering that “this positive development – the highest historically since the 1970s – gives an idea “It is clear that even small business sentiment has become more positive.”
He continues: “Small companies have certainly been harmed by the rise in interest rates… and therefore the trend towards lowering prices gives an indication of positive performance.”
But on the other hand, a senior financial markets analyst at the Equity Group, in his statements to the “Eqtisad Sky News Arabia” website, speaks regarding the most prominent fears haunting the American economy, most notably the fears associated with the United States entering a recession in the next year 2024, as he pointed out. Federal Reserve Chairman Jerome Powell, in his latest press conference, in terms of the efforts made to ensure moving away from a recession scenario, and entering into a “soft and smooth landing,” meaning recording a slowdown in inflation while maintaining economic growth.
This “soft landing” will in turn constitute the “optimal scenario” for US stocks in general, and technology sector stocks in particular.
The head of the US Federal Reserve, Jerome Powell, confirmed in his press conference following the bank’s last meeting that there is a possibility that the US economy will slide into a recession next year. He stated that the Fed relies on economic data to take the necessary measures.
During yesterday’s session, stocks rose broadly during regular trading on Tuesday, with the Standard & Poor’s 500 index rising by 0.59 percent and approaching its record and highest close during the day, which it recorded in January 2022. The Nasdaq Composite Index also rose by regarding 0.7 percent (achieving its ninth gain). Daily in a row) to close above 15,000 points for the first time since January 2022. The Dow Jones index jumped by 0.66% to exceed 37,500 points for the first time in its history.
Potential effects of an economic slowdown
From London, international economic expert, Muhammad Yaslam Al-Filali, says in exclusive statements to the “Eqtisad Sky News Arabia” website:
- Consumer spending growth in the United States is likely to slow in 2024 due to factors such as declining savings, stagnant wages, etc.
- There are also concerns regarding declining investment and rising loan defaults by US companies, which face payments in 2024 that might approach $2 trillion.
He explains that the potential effects of the economic slowdown may put negative pressure on corporate profits and affect asset prices, which poses risks to the current high valuations, despite the fact that investors in US markets have expressed their willingness to pay high valuations for stocks.
He adds: “We expect US corporate profits to decline, but we also expect investors to remain willing to pay higher prices than in 2023.”
Speaking in the context of technology stocks, he said:
- Our expectations indicate that there are factors that will push technology stocks higher in 2024.
- These factors are summarized in the change in the direction of the Federal Reserve regarding the tone and the actual level of interest, in addition to the cost-cutting policy adopted by large technology companies. Increasing the pace of integrating artificial intelligence into various economic activities.
Regarding the monetary policy trends of the US Federal Reserve, Al-Filali explains that it is expected to maintain interest rates at the level of 5.25-5.5 percent even following the US elections, that is, late 2024, in his estimation, noting that “it is likely, as a second scenario.” “The Fed will cut by 50 basis points in the third and fourth quarters.”
Better economic performance
In addition, Hamid Al-Kafaei, a researcher in political and economic affairs, points out in exclusive statements to the “Eqtisad Sky News Arabia” website that:
- US stocks will perform well in 2024, better than in 2023, for many reasons.
- Among these reasons: the improvement of the economic and investment environment with the trend to lower interest rates and reduce inflation.
- There is also a degree of optimism in the United States following the Federal Reserve succeeded in staving off financial crises, especially the crises that struck American banks and the collapse of four banks during this year.
- There is confidence on the part of investors as well as depositors in the actions of the Federal Reserve, as well as in the actions of the US Treasury.
- The aforementioned institutions reassured Americans that their money was safe and there was no fear, and the Federal Reserve Board compensated depositors who lost their deposits, even those whose deposits exceeded $250,000. (Federal Deposit Insurance).
He also refers to the financial subsidies that were provided to many companies, especially companies involved in the production of semi-transports (…) and with the focus now on the American interior, meaning that competition from abroad is no longer strong, and therefore American companies feel comfortable in this context.
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