New Year Nerves: Why We’re Still Optimistic
Do Conditions Favor a Strong Year in the Markets?
December’s message from the Federal Reserve – rate cuts seem in the cards this year – ignited a strong rally for both stocks and bonds. In the end, total returns for U.S. stocks came in north of 25% for the 2023 calendar year, while a balanced portfolio of 60% stocks and 40% bonds returned 18%, well above the 5% return offered by Treasury bills.
The bullish case for stocks and bonds builds on what is seen as a favorable macro backdrop: moderating growth (strong enough to avoid recession, but not so strong it would spur higher policy rates) coupled with steadily cooling inflation. In such an environment, corporate earnings could grow at a decent clip, propelling equities higher. For bonds, attractive starting yields offer the potential for strong forward-looking returns.
The bearish case builds on what is seen as an unfavorable macro backdrop: Inflation persists, delaying rate cuts, pushing bond yields higher (and prices lower), increasing the risk of recession and depressing corporate profits.
We’re firmly in the bullish camp.
A sweet spot for stocks?
We do think there is a bullish case for stocks and bonds; however, Wall Street analysts may underestimate the potential for stock gains. The most bullish forecast for the S&P 500 that we can find sees the index at 5,400 by the end of the year, implying a price return from current levels of around 15%. There is a reasonable chance that the equity market is entering a sweet spot in terms of inflation, earnings growth and monetary policy. If so, 15% would be a reasonable expectation for stock market appreciation. If that is correct, valuations wouldn’t have to change for appreciation to match earnings growth. Remember, the S&P 500 is already emerging from its own earnings recession, and margins are stabilizing while profits continue to grow.
The bull case for bonds (especially relative to cash) is even simpler. In every Federal Reserve rate-cutting cycle since 1960, bonds have outperformed cash.
Inflation risks could reemerge. It’s possible – but unlikely. The biggest risk investors may face heading into the year isn’t recession, inflation, geopolitics or elections – it’s not being fully invested.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: J.P. Morgan Private Bank, January 16, 2024. “Do conditions favor a strong year in the markets?” By Jacob Manoukian, U.S. Head of Investment Strategy, J.P. Morgan Private Bank
