21st Century Business Herald special researcher Wang Yinggui and Liu Zhichen report from Canada
In 2023, the performance of the US financial market can be described as "magical". As well-known American media said, in 2023, investing in the S&P 500 is more than any investment. As of December 26, 2023, the S&P 500 index rose 24.19%, Treasury yields climbed and then leveled off, with 10-year Treasury futures inching up 0.03%, the U.S. dollar index (against major Western currencies) down 2.70%, Bitcoin soaring 156.08%, WTI futures down 6.47%, and the Bloomberg Commodity Index down 11.43% due to rigid demand for oil. Market performance next year depends on how the factors influencing the market evolve this year.
The Fed dominates market sentiment and has been reactive in its decision-making
The Federal Reserve is once again the protagonist of financial markets. The Fed's forecasts for important economic indicators were largely completely wrong, with real economic growth growing faster than expected and unemployment and inflation falling slower than expected. As in 2022, the Fed continues to direct dramatic changes in financial markets, and its interpretation of inflation has caused a series of ripple effects in the market. Throughout the year, the Fed's decision-making has been driven by market expectations, and its policy orientation has been full of contradictions and abrupt moves.
On February 1, 2023, Fed Chair Jerome Powell argued that the process of disflation has begun, but it is still in its infancy, and that the Fed's monetary policy has not yet reached a sufficient level of tightening, and the rate hike cycle has not yet ended. On 22 March, the Fed saw inflationary pressures on core services, which are 56% of the index, unabated. To this end, Powell put forward two major conditions for reducing inflation: economic growth is below the long-term trend for a period of time, and the job market is cooling. He also cautioned that a rate cut is not part of the Fed's underlying assumptions.
On 3 May, the Fed's monetary policy statement dropped the phrase "sufficiently restricted" (monetary policy orientation must be achieved), and Powell signaled to markets that there was a "pause" in June, and the Fed's top priority was no longer a rate hike, but inflation. On 14 June, as expected, the Fed paused interest rate hikes. On 26 July, the Fed raised interest rates by 25bp in the face of extreme uncertainty. This lack of confidence continued until September 22, when the Fed disappointed investors with information that there would be another rate hike this year, and the "higher for longer" rhetoric scared off investors. At the time, Fed officials struggled with whether policy was too strong or too tight.
On 9 November, Powell said at a forum of the International Monetary Fund that inflation in the United States has come down, but it is still far above the 2% policy target, and that there is a long way to go to control inflation; the job market is still tight, and the relationship between supply and demand will gradually reach an equilibrium level; economic growth is strong, but the pace will slow down in the next few quarters; and the Federal Reserve will pay attention to the risks posed by strong economic growth to the supply and demand relationship in the labor market and control inflation, and will take corresponding monetary policy measures at any time. However, on 3 December, the Fed's monetary policy abruptly shifted, emphasizing the importance of fighting inflation and boosting economic growth, with some Fed officials even expecting to cut interest rates by at least 75 basis points next year.
The Fed's judgment on the future economic trend has shifted from left to right, which is fully reflected in the change in the term structure of Treasury interest rates. At the beginning of 2023, the basis points of spreads for all maturities were smaller, but the basis began to widen in March and gradually narrowed from early May, with the yield on 10-year Treasury bonds rising above 5% in October 2023 (causing panic in the market), and then gradually falling back to 4% now. The inversion of US Treasury interest rates still exists, indicating that the US interest rate market has not yet returned to normal, so many market analysts firmly believe that the long-term interest rate inversion is a symptom of a recession.
The performance of the stock market sector is differentiated, with technology stocks supporting the broader market
The rise and fall in 10-year Treasury yields has had the biggest impact on the U.S. stock market, especially the high-tech sector. As a benchmark for valuations, rising interest rates mean lower stock market valuations, and lower interest rates signal rising stock valuations. As shown in Figure 2, the S&P 500 fell when the yield on 10-year Treasury bonds rose, and this was especially evident in the third quarter. So far, the US stock market has completely recovered the losses of 2022 (-19.44% last year). Compared with the first half of the year, the rise in the second half of the year expanded to more industries, but the performance of industry indices still varies greatly.
The S&P 500 includes the Real Estate, Communication Services, Consumer Essentials, Consumer Essentials, Energy, Financials, Healthcare, Industrial Manufacturing, Information Technology, Materials, and Utilities sectors. In 2023, U.S. stocks will rise in real estate, communication services, consumer options, financial services, industrial manufacturing, information technology, and materials, while consumer staples, energy, healthcare, and utilities will decline. Among them, the communication services, information technology and consumer options sectors have seen impressive gains, and information technology and consumer goods are also the biggest winners over the decade (see Table 1 for details).
The performance of the "Big Seven" of American technology is particularly prominent. As of December 26, Apple, Microsoft, Amazon, Nvidia, Google, Meta, and Tesla have risen by 45.3%, 55.57%, 84.96%, 234.18%, 55.37%, 185.06%, and 109.72% respectively, with a total increase of $5.16 trillion compared to the end of 2022, contributing more than 66% to the increase in the S&P 500 index, although the weight only accounts for 28.27% of the index, so the "Big Seven" The performance will also be related to the trend of U.S. stocks next year.
In contrast to the secondary market, the primary market performance of U.S. equities remains subdued and the market is still recovering. According to the Securities Industry and Financial Markets Association (SIFMA), from January to November this year, the total amount of equity financing by U.S. companies was $129.5 billion, slightly higher than the $93.1 billion in the same period last year, and the overall level was lower than the normal level before the epidemic. Among them, the IPO, additional issuance, and preferred share financing were 19.7 billion, 92.5 billion, and 11.7 billion US dollars, respectively.
The bond market has been relatively normal. From January to November this year, the bond market raised $7.85 trillion, slightly lower than the $8.53 trillion raised in the same period. Among them, the newly issued treasury bonds, real estate mortgage bonds, corporate bonds, local government bonds, agency bonds (bonds guaranteed by the three major real estate institutions in the United States), and asset-backed bonds were 3.36 trillion U.S. dollars, 1.22 trillion U.S. dollars, 1.41 trillion U.S. dollars, 0.35 trillion U.S. dollars, 1.26 trillion U.S. dollars, and 0.25 trillion U.S. dollars, respectively. What worries the market is that the current subscription rate of long-term government bonds is not high, which is lower than the historical normal.
The U.S. dollar exchange rate rose first and then fell, and cryptocurrencies gained strong momentum
With the change of the Federal Reserve's monetary policy, the exchange rate of the US dollar against major currencies has shown a trend of first rising and then falling. Among the most actively traded currency pairs, the U.S. dollar depreciated against major European and American currencies, but appreciated against major East Asian currencies and was mixed against other currencies. Specifically, as of December 26, the euro, the British pound, the Swiss franc and the Canadian dollar appreciated by 3.11%, 5.17%, 8.30% and 2.68% against the US dollar, while the US dollar appreciated by 8.73%, 3.66%, 2.60% and 0.52% against the Japanese yen, the renminbi, the South Korean won and the Indian rupee respectively, and depreciated by 1.23% against the Singapore dollar. Little change against the Australian dollar. The end of the Fed's interest rate hike cycle has reduced the pressure on the global foreign exchange market, but because the monetary policy of the central banks of European and American countries is consistent with that of the US Federal Reserve, its currencies are less affected by the interest rate differential between the local and US dollars, while the major central banks in Asia adhere to their own monetary policies, and their currency exchange rates are more affected by interest rate differentials.
As inflation has become a common problem faced by most countries and regions in the world, the investment industry is actively seeking safe-haven assets, and Bitcoin has once again entered the industry's field of vision. Affected by the scandal in the circle this year, the cryptocurrency world has shown great volatility, and prices have skyrocketed and plummeted. But as the trial of former FTX president Sam Bankman-Fried progressed, the truth of the case was revealed, and the mainstream enthusiasm for crypto assets in the investment community was once again ignited. For example, BlackRock submitted an application to the U.S. Securities and Exchange Commission (SEC) to set up a bitcoin spot ETF fund, which also swept away the decline of the cryptocurrency market, and the price of bitcoin quickly broke through the key technical level of $40,000 and drove other cryptocurrencies to rise sharply.
Commodity markets behaved very differently, with gold prices eye-catching
The commodity market mainly includes metals, energy, agricultural products, etc. In the metals market, precious metals (gold) are outperforming, while base metals are underperforming. In 2022, global central banks increased their holdings of gold sharply, pushing up the price of gold, and in 2023, inflationary pressures will still exist, and gold will continue to play a role as a store of value, as of December 26, gold futures prices have risen by 13.73%, and silver has only risen by 1.93%. Except for copper, which rose by 2.66%, other metals showed declines of varying magnitudes. Among them, platinum (platinum) fell 7.76%, palladium fell 34.06%, nickel (used in car batteries) fell 44.67%, aluminum fell 2.96%, and zinc fell 12.40%.
In 2023, the energy market will be more affected by rigid demand, but it will be less sensitive to international geopolitics. Despite the ongoing conflict between Russia and Ukraine, tensions in the Middle East, and no matter how Russia and the Organization of the Petroleum Exporting Countries (OPEC) (Organization of the Petroleum Exporting Countries) led by Saudi Arabia cut production, the energy market remains very weak. So far, WTI is down 6.38% and Brent is down 6.04%. The UK economy is in recession, the European economy is in a quagmire, China's demand for oil is weakening, and crude oil prices lack upward thrust. It can be seen that economic weakness and green transition have long-term lethal effects on oil prices.
In terms of agricultural products, the price differences between grains, soft commodities and meat are also considerable. In terms of grain, wheat, corn, soybeans and brown rice in the United States fell by 19.74%, 29.27%, 13.60% and 2.49% respectively. In terms of soft commodities, U.S. No. 2 cotton fell by 3.81 percent, timber rose by 10.07 percent, cocoa, coffee, orange juice and No. 11 sugar rose by 65.23 percent, 16.50 percent, 55.5 percent and 2.1 percent respectively. In terms of meat, live cattle and beef cattle rose by 22.38% and 10.26%, but the price of lean pigs fell by 21.04%.
The U.S. economy has a new normal, how will the financial market go in 2024?
The Fed's monetary policy orientation remains the most important factor influencing financial markets. When and how many times will the Fed cut interest rates? According to the forecast of Fed officials on December 13, the US economy will grow at a rate of 2.6% in 2023 (median, the same below), but the growth rate will slow to 1.4% in 2024. Obviously, as is the market consensus, Fed officials predict that economic growth is unlikely to be as strong next year as it is in 2023, and that the effects of interest rate hikes and inflation will eventually work on growth, and that the unemployment rate will naturally rise to 4.1% from the current 3.8%. Financial markets are less focused on economic growth and unemployment, but continue to track changes in core inflation (Core PCE), with Fed officials forecasting inflation to fall from the current 3.2% to 2.4% by the end of 2024.
Based on the current state of the economy, Fed officials expect the federal funds rate to fall from the current 5.4% to 4.6% by the end of 2024, which is the market's speculation of at least a 75 basis point cut next year (three cuts), and some believe a 120 basis point cut. However, judging from the published information, the number of officials predicted at 4.6% is 6, the number of officials with a forecast of more than 4.6% is 8, and the forecast is less than 4.6% with 5 people, which shows that there is a large disagreement within the Fed. These forecasts are only those of officials, but they are not actual policy blueprints, so investors cannot take them too seriously, and Fed officials often make mistakes of one kind or another.
In fact, some in the market have read the Fed's forecasts so much that several Fed officials have poured cold water on them. In the author's view, there is a new normal in the US economy: the job market continues to be strong, the economy continues to grow, but inflation has cooled, that is, the relationship between the job market, economic growth and inflation is weakening, or is no longer so stable. Of course, the U.S. economy is no longer purely a market economy, and since the 2007-2009 financial crisis, the growth model has changed significantly: fiscal stimulus and quantitative easing have sustained economic growth. Once the stimulus wanes, the U.S. economy returns to its previous period of low growth. Judging from the last two economic recessions, the crisis has become more and more destructive, and the responsibility for bailing out the market has increasingly fallen on the shoulders of the Federal Reserve.
In addition, international geopolitics will continue to affect inflation, but this year will have a very limited effect. No matter how the conflict between Russia and Ukraine evolves, or how the situation in the Middle East changes, global inflation will slowly fall, inflation is no longer the core concern of the Fed, and economic growth is on the Fed's agenda. Based on the above analysis, and given the previous mistakes, the Fed will also be cautious in 2024, and will continue to monitor the development of inflation and consider cutting interest rates when the dust settles. Inflation and interest rate costs, which have lasted for more than two years, have weakened household spending power and increased corporate interest costs, so the author predicts that the weakness of the US economy in 2024 may be seen in the first quarter, and the second quarter will continue to be mildly weak, and the Fed may choose to cut interest rates at its June or July meeting.
Looking ahead to 2024, the U.S. election is a wide-ranging political event, and the outcome of the election will have a significant and profound impact on politics, economy, military and diplomacy over the next four years. Since the end of World War II, the United States has held a total of 18 elections, and the S&P 500 index has increased by an average of 11.02% (including dividend yield) in the election year, and the probability of a stock rise is 88.89%, but since 1980, a total of 11 elections have been held, and the index has risen by an average of 8.82%. In the post-war election years, the S&P 500 fell only two times, in 2000 (-9.1%) and 2008 (-37%). Of course, the performance of the stock market next year cannot be speculated from these historical data performance, but also from the current actual situation, because the economic environment is new every year.
First, the Fed's monetary policy will continue to support the U.S. financial markets and gradually become neutral. Interest rate differentials have corrected, either long-term interest rates rise or short-term interest rates fall, but long-term interest rates are more likely to rise, and interest rate factors are not as effective for financial markets as they were in 2022 and 2023.
Second, the performance of U.S. technology stocks will determine the general trend of the stock market in the new year. As mentioned earlier, the "Big Seven" of U.S. technology will lead the market rally in 2023, and whether it can continue to rise in 2024 is a key factor in market performance. With the exception of generative AI, other tech sectors are in contraction, and it may be unrealistic to expect tech stocks to continue to gain momentum. Can tech giants produce results commensurate with their stock prices? It is expected that the performance of US stock indices in 2024 will be relatively flat, and it should be normal for 8% to rise or fall.
Thirdly, the strength of the US dollar is weak, but the downward momentum is stronger, and the US dollar will depreciate against major currencies to a certain extent. Crypto assets have a certain market foundation, and if BlackRock's application is approved, Bitcoin still has some room to appreciate, but the momentum will be weaker than in 2022.
Finally, it is just necessary to decide on the price of energy, and the price of crude oil should run in the range of $50-85 per barrel. The price of gold will return to around 1800 again, and the prices of agricultural products, which have fallen this year, will stabilize and gain some gains.
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