Half Gone, Half Left – The Year 2024

5 min read

Dear Reader,

Welcome back to our latest edition of Market Insights with Sanjeev Kaushik.

This edition is aimed at taking stock of developments so far in equity markets with major focus on the U.S. Starting off with the big picture, we will look at the three driving engines of growth for the world economy before drilling down to the macros in the U.S. focusing on inflation trajectory and rate cut timings.

We will also try to demystify the performance of U.S. Equity Markets so far and how the rest of the year 2024 may pan out according to past behavior of markets.

Lastly, do not miss our educational content about investing in Stocks vs. ETF and how to read PE & PEG Ratio. So let’s dive right into it..

Today at a glance:

• The Three Musketeers
• Sticky Inflation
• Fall You Must – Interest Rates!
• Where do Markets go from here?
• Stocks vs. ETF Investing – How to Decide
• From the Vault – PE & PEG Ration (Rule of 100)

The Three Musketeers

With Interest Rates among the highest in last few decades across the globe, many major economies have slowed down considerably. However, there remain three bright spots still driving the global economy higher namely, India, Japan and the U.S. The higher economic growth in US is also keeping USD stronger for a stretched period of time which in-turn is putting additional pressure on import driven countries that generally run trade deficit.

Albeit, there are signs of slowdown in U.S. economy as is evident from Jun reports, yet IMF in April 2024 raised its forecast for U.S. growth to 2.7%, compared to 0.8% for Europe. It will be interesting to see if U.S indeed sees such growth or will the estimates turn out to be wrong. Atlanta Fed GDP forecast for the second quarter of 2024 is 1.5 percent down 50% from the estimates of 3% in the month of June itself.

The U.S. witnessed a huge downward swing in economic activities that may not have been the base case for many forecasters. Which makes one wonder about the path Fed will take in cutting the Fed Fund Rates in 2024 and beyond. Fed’s laser sharp focus on Inflation trajectory is still keeping investors guessing about the timelines of rate cuts.

Let’s take a closer look at Inflation progress as well as what the predictions look like for the rate cuts over next couple of years.

Sticky Inflation

While Inflation fell rather sharply towards the second half of CY 2023, yet 2024 is witnessing a slower downward journey testing patience of Fed & Investors alike. Fed is still sticking with its narrative of needing more evidence of a cooling down inflation before cutting the rates.

Fall you Must – Interest Rates!

Fed Chair Jerome Powell cited two paths to rate cuts: unexpected weakness in the labor market or inflation sustainably down to 2%. Most economists are confident that price increases will fall closer to the Fed’s target by year-end. That’s largely because rent increases — a major reason the Core Consumer Price Index remains elevated — continue to modestly improve.

Additionally, the higher inflation we saw for certain goods and services earlier this year may be reflecting some seasonal adjustment distortions.

Where do Markets go from here?

Accelerating earnings growth can provide support for equity valuations

The sunny picture for corporate earnings appears to be brightening further.

In the U.S., Wall Street analysts expect earnings for companies in the S&P 500 Index to grow more than 10% in 2024, with further acceleration in 2025.

Equity market valuations don’t appear to be particularly stretched, even after market rallies. Price-to-earnings ratios for most markets were near or modestly above their 10-year averages as of May 31 2024.

At the time of writing this newsletter, both S&P 500 & Nasdaq Indexes closed at their all-time highs. S&P 500 is up 16% in the first half of 2024 and history is on the side of the index to close at levels higher than mid-year’s. Yet, it is common for investors to fear the all-time highs even though one of the most bullish things markets often do is consistently stay and keep closing at all-time highs.

Stock market highs can feel like a mixed blessing. When stocks reach record highs, investors may conclude the market has peaked and they’ve missed the boat. A look at history shows that has not typically been the case. Over long periods, markets have trended higher and peaked multiple times in prior cycles.

Of course, market declines are also inevitable, and stocks can fall at any time. But history has shown that fresh highs have often been a good entry point for long-term investors.

Since 1950, each time the S&P 500 Index hit its first all-time high in at least a year, stocks then delivered a 17.1% average return for the subsequent 12 months. An investor would have had gains in each of these periods except the start of the global financial crisis in 2007.

So what’s the bottom line?

Historically, bull markets have been much longer than bear markets, leading to new highs within each cycle and the years with first half positivity lead to even higher close in second half most of the times.