First, this: everyone hail 2023.
If you're a bull, you loved how the stock market ended the year: The Standard & Poor's 500 Index (^EN) – Get a free report increased by 24%. The Nasdaq Composite Index (^COMPX) – Get a free report jumped 43% and the Dow Jones Industrial Average (^DJI) – Get a free report rose 13.7%. The small-cap Russell 2000 index rose 15% after small returns at the start of the year.
But those results come from a dismal 2022, when the S&P 500 fell 18.3%, the Nasdaq 33.1%, the Dow a modest 8.6% and the Russell 2000 21.6%.
That said, the 2023 market made its way through dysfunction in the House of Representatives, a banking crisis that began when Silicon Valley Bank collapsed, shaking oil and gasoline prices, and wars in Ukraine and Israel.
But you have to moderate the euphoria a little. The S&P 500 ended 2023 just 4.4% higher than its 2021 close, with the Nasdaq up 5.5% and the Dow just 4.8%. The Russell is down 1.7% since its 2021 close.
Additionally, the S&P 500 in 2023 was distorted by the huge gains of the Magnificent Seven stocks: Apple (AAPL) – Get a free report (48.2%), Amazon.com (AMZN) – Get a free report (80.9%), Alphabet, Google's parent company (GOOGLE) – Get a free report (58.3%), Facebook parent metaplatforms (GOAL) – Get a free report (194.1%), Microsoft (MSFT) – Get a free report (56.8%), NVIDIA (NVDA) – Get a free report (238.9%) and Tesla (TSLA) – Get a free report (101.7%)
The group alone accounted for 62% of the S&P 500's 26.9% total return (appreciation plus dividends) in 2023.
How then to look at 2024? Here are 10 things to keep in mind now and throughout the year.
To get an early idea of what's coming, check out holiday sales reports and corporate previews. Retailers won't report their fourth-quarter results until mid-February. But many do report December sales in January. This will give investors a better idea of what happened during the holiday season. Anecdotal information suggests that many shoppers were cautious in their holiday spending. Companies that have bad news to report like to release it as quickly as possible before the scheduled earnings release date. Most fourth-quarter results will begin to be released in mid-January.
Watch for the January effect. Surprisingly, 70.5% of the time since then 1929, a positive month in January meant a good year for stocks, according to S&P Dow Jones. In January 2023, the S&P 500 rose 6.2%. It fell 6.1% in January 2008, a horrible year.
Related: What is the January effect? It is real?
The Federal Reserve is going to cut rates in 2024. The question is when. The earliest possible date for a rate cut is Jan. 31, the end of the central bank's first meeting of 2024. The current federal funds rate is 5.25% to 5.5%. It is the base rate upon which most American interest rates are built. Financial markets expect six rate cuts, and the first cut will be made in March. Wall Street may be too optimistic on this point. May or June seem more likely. The Federal Reserve rarely makes an abrupt policy change. They did so in 2007, when it became clear that the economy was rapidly sliding into what would become the Great Recession.
How Far Will Mortgage Rates Fall? The rate on a 30-year mortgage is about 6.6%, up from 8% in October. If the Federal Reserve cuts rates as aggressively as some think, we could see mortgage rates between 5% and 6% sometime in mid-2023. Existing Home Sales for 2023 as the worst since 2011, according to Statista. Many believe rates below 7% will spur more home sales activity. In reality, this affects everyone. Each home sale generates thousands of dollars in additional expenses on furniture, appliances, renovations, painting and the like.
The street
But isn't a recession looming? Recessions arise when a large economic sector collapses and drags everyone else down with it. To wit: the near-collapses of the banking, real estate and auto industries in 2008. Everyone on Wall Street and around the world expected one in 2023. It didn't happen. There is still a lot of talk about the looming recession in 2024 because the global economy will finally feel the full effects of interest rate increases in 2022 and 2023. But there needs to be more of a trigger than mere weakness in, Let's say, the retail sector. or technological employment. Oil prices will be something to watch, especially if the conflict between Hamas and Israel escalates or the war between Ukraine and Russia worsens.
Was the stock market performance in 2023 exceptional or the start of a new bull run? Many market watchers are comparing what happened in 2023 (which surprised almost everyone) to what happened when the Federal Reserve raised rates rapidly in 1994 and then began cutting them in 1995. The cuts came as the Internet became much more than a chimera: inflation. was low, global tensions were minimal for a change. Result: five consecutive years of double-digit gains for the Dow, the S&P 500 and, especially, the Nasdaq, which gained 85.6% in 1999 alone. That precipitated investor interest in almost every technology idea, including the silliest. The dot-com bust broke out in 2000. Current fuel for the stock market is the strong belief on Wall Street that the rapid spread of artificial intelligence across the economy will produce rapid growth in the coming years.
Related: Analyst makes bold prediction about gas prices in 2024
Are stock prices too high? By some measures, the stock market appears overbought. Last fall's big rally sparked buying demand that accelerated in mid-to-late December. The measure to watch is the relative strength index, which measures how quickly an index or stock price changes. Above 70 suggests something is overbought. The Dow's RSI has been above 70 for 26 consecutive days and 27 of the last 28, with five days above 80. The S&P 500 has been above 70 for 21 consecutive days. The Nasdaq has been above 70 for only 11 of the last 13 days. But it was above 70 on 13 of 16 days in May and June, followed by a lull in July. Prices will break down at some point, at least for a while. It is in the nature of things.
Will the stock market and the economy decide the 2024 elections? It depends. A rising market typically favors the incumbent. The rule did not apply to Donald Trump in 2020, when the S&P 500 rose 16%. Ronald Reagan won re-election in 1984 despite a flat year for stocks (in his defense, the market was up a lot in 1982 and 1983). It was applied to Barack Obama in 2012, when the S&P 500 rose 12.3%, and Bill Clinton in 1996, when the S&P was up 20%.
