Less than a week into 2024, global assets are in turmoil, US Treasury yields and the US dollar are rising, and US stocks are off to the worst start since 2008. This may be just the tip of the iceberg, and the future direction of US stocks may be more difficult to predict, and the key lies with the Federal Reserve.
As Michael Hartnett, chief investment strategist at Bank of America, pointed out in his latest report, the Federal Reserve and Treasury yields are shaping the direction of the bond and stock markets, and falling inflation and interest rates may have a positive impact on risk assets, but if unemployment rises, lower interest rates may have a negative impact on risk assets.
For capital markets in 2024, the Fed and Treasury yields are undoubtedly the two most critical variables. However, when it comes to asset prices, Hartnett sees three areas as having the greatest impact: pricing, corporate earnings, and new events that affect interest rate (policy) expectations.
There will be a number of major macro events this year, and Hartnett has listed 12 major events in 2024 that could impact profits and interest rates:
January: In the big month of Asia, focus on the elections in Taiwan, Japan, and the issuance of U.S. bonds.
February: The geopolitical situation improves.
March: The highlight is the March 20 FOMC meeting and whether the Fed will cut rates for the first time.
April: Whether the U.S. economy can have a "soft landing" will be revealed.
May: Google's antitrust case will be closed from May 1 to 3, focusing on whether the "Big Seven" of U.S. stocks can withstand the test.
June: OPEC Annual Meeting, EU elections in focus.
July: Watch for the longest inversion of U.S. Treasuries since the Great Depression of 1929.
August: Focus on the impact of U.S. "swing states" unemployment on fiscal policy.
September: Focus on the asset size of money market funds.
October: BRICS summit to focus on emerging market equities.
November: U.S. election results announced, focus on the impact on U.S. stocks.
December: The best month on record for U.S. stocks.
January: The big month of Asia
January is a "big month" in Asia: January 13, the day of voting in the Taiwan election, and January 22, the Bank of Japan may end its ultra-loose monetary policies such as YCC (yield curve control) and NIRP (negative interest rate policy).
The biggest event was probably the announcement of Q1 Treasury issuance on 29 January, and the lower-than-expected issuance announced on 30 October was the trigger for a "rally in everything" in Q4, with Treasury yields falling from 5% to 4%.
In addition, January 19 is likely to be the day of the U.S. government shutdown, and the U.S. debt has increased by $10 trillion in 106 days, and the debt size is now over $34 trillion. The consensus expects the release of a $970 billion Treasury program on January 29, and the fear of higher numbers = higher yields, Treasuries are in the midst of a cyclical bull market in a long-term bear market.
February: Geopolitical situation is expected to improve
On February 24, the second anniversary of the outbreak of the Russia-Ukraine conflict, geopolitical confrontation and political polarization may bring benefits...... Monetary and fiscal policy is more accommodative than the macroeconomic situation requires.
2024 is a global election year, and countries that account for 60% of the world's GDP, 80% of the stock market capitalization, and 40% of the population will hold elections this year, and it is necessary to calm the geopolitics, avoid a spike in oil prices, and be bullish on the soft landing view, the decline in oil prices will be a catalyst for strong non-US economic growth in the first half of 24.
March: The Fed's "rate cut" is the main event
March 5 is Super Tuesday in the US, but the highlight is the FOMC meeting on March 20 and the Fed's first rate cut (BofA forecast), with the consensus predicting a total of 150 basis points in 24 years. The rebound in the fourth quarter of last year was at the Fed's interest rate pivot, while the shift to rate cuts could be driven by weaker growth, with the first rate cut likely to be a peak in asset prices, noting that some of the biggest bond market events have occurred when the Fed cut rates.
April: Whether the U.S. economy can have a "soft landing" will be revealed
According to BofA's forecast, the probability of a hard landing/soft landing/no landing is currently 20%/70%/10% respectively, and the landing will be revealed by April 25 when the US Q1 GDP is released.
BofA expects S&P500 EPS to grow by more than 5% in '24, which would require the ISM manufacturing index to rise to 52 and the labor market to remain strong. But it is worth noting that if the ISM of the whole of April
May: The "Seven Sisters" of U.S. stocks met the test of anti-monopoly
If the "Seven Sisters" of US stocks are not taken into account, the S&P 500 would close at 4,175 points in 2023, and the "Seven Sisters" of US stocks account for two-thirds of the 2023 return.
One of the things that investors like about Big Tech is the "moat," the ability to maintain a "monopoly to protect margins, market share, and pricing power." Google's antitrust case, which will be closed on May 1-3, is the first of three antitrust rulings that could directly affect the monopoly positions of Google and Meta and weaken the long-term position of Big Tech.
June: OPEC Annual Meeting, EU elections in focus
The annual OPEC ministerial meeting will be held on June 1, the EU Parliamentary elections will be held from June 6 to 9, and the G7 summit will be held on June 13.
The Fed is expected to cut interest rates for the second time on June 12 and end quantitative tightening, which could cause the USD to move lower in recent weeks, with downside expected to be fully priced in by the middle of the year.
July: Watch for the longest inversion of U.S. Treasuries since the Great Depression of 1929
The Milwaukee Republican National Convention will be held on July 15 and will produce a Republican presidential nominee. The 3M-10s Treasury yield curve is currently at -141bps, which has been inverted for 15 months, and if it continues to invert by July, it will last the longest since the October 1929 Great Depression (19 months).
August: Focus on the U.S. "swing state" unemployment rate
August in the fourth year of a presidency tends to be the best month for U.S. stocks, and the Democratic National Convention in Chicago on August 19 is already having an impact on policy and markets, but the impact will be even more pronounced in August.
Keep an eye out for unemployment rates in some of the key swing states (Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, Wisconsin) and note that Pennsylvania's initial jobless claims are at their highest level since July 2021, which is a rare time when presidential approval ratings are so low during a period of low unemployment, which could mean more policy stimulus, but it could also be the start of volatility.
September: What is the size of money market funds?
BofA expects money market fund assets (currently $6 trillion) to peak in September.
BofA's analysis shows that: i) money market fund inflows are not unusually high in 2023 (up only 25% from the average annualized increase of 33% over the previous four cycles), ii) current money market fund inflows will end in September 2024 (money market fund asset sizes typically peak 14 months after the last Fed rate hike), and iii) outflows from money market funds will begin in March 2025 (i.e., 12 months after the first Fed rate cut).
October: BRICS summit
The BRICS summit will be held in Kazan, Russia, for the first time with an expanded membership (Saudi Arabia, United Arab Emirates, Iran, Argentina, Egypt, Ethiopia, Brazil, Russia, India, China, South Africa).
The new BRICS-11 countries account for 51% of global CO2 emissions, 46% of the population, 45% of energy consumption, 45% of oil production, and 37% of global GDP in purchasing power parity terms. However, these countries have a market capitalization of less than 25% of the global market capitalization, and emerging market equities are also at 52-year lows compared to U.S. equities... BofA recommends buying emerging market equities and selling U.S. equities in 2024.
November: U.S. election results announced
On November 5, U.S. Election Day, the conventional wisdom is that the election, while potentially chaotic, will not have much of an impact on markets. In the 2016 and 2020 elections, the situation was clearly different, with the stock market surging more than 5% in November (as has only happened since Reagan's election in 1980 since World War II) and rising 9-14% in the following three months.
December: The best month on record for U.S. stocks
Without any major events, December tends to be the best month for U.S. stocks, with an average gain of 1.3% since 1928. This has been proven once again in 2023, with US equities surging to near-all-time highs, although still 12% below their November '21 highs in real terms.
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