Perhaps the most pressing: will behavior in the financial markets return to something more closely approximating normal in 2024? At least one prominent Wall Street strategist expects the answer to that question is “yes.”
“The focus in 2024 shifts from 2023’s recession and inflation tail risks to degrees of normalization in growth, policy and cross-asset relationships,” said Stuart Kaiser, head of equity trading strategy at Citigroup Global Markets, in his team’s first client report of the new year.
In the report, which was viewed by MarketWatch, Kaiser laid out five questions that could have major consequences for markets in the new year. He expects to have answers in “early-ish 2024.”
Does broader earnings growth mean broader leadership?
It’s hard to imagine the stock-market rally broadening out if companies struggle to back up last year’s gains with earnings growth.
Kaiser and his team believe earnings will need to grow more evenly across the S&P 500’s 11 sectors for stocks to see a broad-based rally in 2024. But earnings still represent a key risk for markets, since across Wall Street, analysts widely expect to see them boom after a lackluster year for earnings growth in 2023.
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Kaiser and his team have a particularly rosy outlook. They expect that five of 11 sectors will report growth of at least 10% in 2024, higher than the consensus estimates collected by Bloomberg.
Over at FactSet, the bottom-up consensus estimate calls for S&P 500 firms to grow earnings by 11.7% during the calendar year 2024.
Will a U.S. recession finally arrive?
Another key question for markets: Has the U.S. economy put the risk of recession in the rear view mirror?
Or is it still possible that the U.S. economy could sink under the weight of the Fed’s aggressive interest-rate hikes.
Citi’s U.S. economy team projects a recession beginning in the second quarter. Regardless of whether this comes to pass or not, Kaiser and his team expect traders will be paying more attention to GDP and labor market data following two years where inflation reports and meetings of the Fed’s policy-setting committee generated larger reactions in markets.
Think of it as another relationship in markets that Kaiser expects will revert back to its historical norm in 2024.
“Equity markets typically move more on growth than inflation data. That pattern reversed during the past two years with CPI and FOMC days taking precedence. We expect a shift back towards ‘normal’ in 2024 unless inflation hooks higher again,” he said.
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What is the Fed’s rate-cut calculus?
There has already been plenty of chatter on Tuesday about interest-rate derivatives markets pricing in as many as six rate cuts from the Fed in 2024.
But according to Kaiser, the Fed’s reasoning for cutting rates will likely be as, or more, important than the number and pace.
“The ‘why’ matters. Insurance cuts would be very positive for equity markets, but if cuts are demanded by recession conditions, markets will first sell off sharply,” Kaiser said.
Will investors see stock-bond correlation revert back to normal
MarketWatch tackled this topic back in December: after two years where stocks and bonds climbed, or sold off, in lockstep, will investors see the cross-asset relationship return to normal?
See: Why the 60/40 portfolio is poised to make a comeback in 2024
Kaiser and his team expect the correlation between U.S. stocks and bonds to slide back into negative territory this year.
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Should investors worry about a January rotation?
Investors shouldn’t get too worked up if the growth stocks that helped prop up the market in 2023 struggle at the start of the new year.
Turns out, this is not uncommon. According to Citi’s analysis of equity factor performance, momentum stocks have a strong seasonal pattern of not liking January very much, as the chart below shows.
Already, the Nasdaq Composite
COMP
is down more than 1% during the first trading session of the new year as the market struggles.
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Investors who are looking to profit from a more enduring change in market leadership should consider bullish call options tied to an ETF that tracks the Russell 2000
RUT,
or betting that the equal-weighted version
RSP
of the S&P 500
SPX
outperforms its market-cap weighted sibling.
U.S. stocks are on track to finish the first session of the year in the red, with the S&P 500 down 20 points, or 0.4%, at 4,749. The Nasdaq off 193 points, or 1.3%, at 14,816.
Meanwhile, the Dow Jones Industrial Average
DJIA
was up 47 points, or 0.1%, at 37,741, while the small-cap Russell 2000 was up 2 points, or 0.1%, at 2,028.
