What investors need to prepare for in 2024

The outlook for the stock market at the end of 2022 was worse than ever. The result was new records for the DAX and a party for US technology stocks. Let's see how good the coming year will be.

At the end of last year, everything was a foregone conclusion for 2023. Interest rates were way up, and of course this couldn't be good for Nasdaq technology stocks any more than for gold or Bitcoin. Shortly before the turn of the year, the conclusion is that things have turned out quite differently. Twelve months ago, for the first time in ages, the majority of analysts at major banks were negative. They were wrong.

The mood at New Year 2023 was so bad "that a sharp drop of more than ten percent was expected for the first half of the year," says Salah Eddine-Bouhmidi from broker IG, looking back. Now, crisis prophets on the stock market are like clocks that have stopped. They are almost always wrong. They only show the right time twice a day. The receipt followed in 2023, as apart from two minor corrections in the DAX in March and October, hardly any setbacks invited investors to buy more. "The market usually takes the path of greatest pain," says Stefan Riße from Acatis. Last year, this pain was on the upper side of the price chart in Europe as well as in the USA. In the meantime, share prices have soared to new highs. The German share index saw the 17,000 mark for the first time, even though the more comparable price index is still some way off the record and the SDAX and MDAX also have a lot of catch-up potential.

However, the starting position today is different to that at the end of 2022. "Almost 80% of assets managed by professionals are invested in US equities. That is a high figure, but not yet an extreme one; with leveraged instruments, 110% is also possible, as was the case at the beginning of 2021," points out Jürgen Molnar from broker RoboMarkets. A good half of investors see the S&P 500 moving higher in the next six months. There is still some leeway up to the rarely reached threshold of around 60 percent, but the risk/reward ratio has deteriorated significantly. The very low volatility is sending similar signals. However, caution is advised here: In the ups and downs of the past two years, the fear barometer has proven to be a good compass. In strong upward phases such as from 2019 to 2020, however, the almost consistently low vola was not a reliable counter-indicator.

Interest rate cuts not always positive

The question therefore arises as to whether the dream of the Goldilocks scenario (moderate growth, moderate inflation, low interest rates) could burst like a bubble and risks are not priced in enough. The central banks, whose monetary policy course ultimately has a strong influence on the direction, are at least more likely to provide support. Fed Chairman Jerome Powell played Santa Claus at the December meeting and left nothing to be desired. "Three interest rate cuts by 2024 are nothing less than a 180-degree turnaround in US monetary policy," says RoboMarkets analyst Molnar. The first adjustments could even come sooner than expected. "This is because the Fed will not want to be accused of influencing the outcome of the election in early November with greater easing," believes IG expert Bouhmidi. Nevertheless, the interest rate cuts of 150 basis points priced into the futures market are likely to prove too ambitious.

Interest rate cuts are also not positive per se for the stock market. "If the economy was in recession, the S&P 500 was around 20 percent lower on average around ten months after the first easing. Without a recession, which was rather rare, it rose by five percent," says expert Riße. So the music is playing before the first easing, after all, the future is being traded on the stock market. However, experts from the fund boutique Skeptiker point out that for some, the Fed is already "behind the curve". It should have started cutting interest rates long ago, they worry.

The trees do not grow into the sky

On the other hand, the shift of capital from equities to bonds is likely to be well advanced. Leveraged securities on interest rates or Treasuries have recently been a frequently traded asset class at the smart broker. Following the fall in 10-year interest rates to around four percent, the relative valuation of the S&P 500 compared to bonds appears more attractive again. The only problem is its own historical comparison. Based on earnings estimates for the next twelve months, the P/E ratio is 19, which is significantly above the 10-year average. However, the popular valuation ratio only tells half the truth. "Similar to the performance analysis, the big tech heavyweights distort the average significantly upwards. Without the giants, the US stock market is actually quite attractive," says RoboMarkets.

But only if the companies deliver on the earnings side. Growth of seven percent is expected for the first quarter of 2024, followed by eleven percent in the second quarter and a sporty twelve percent for the year as a whole. Artificial intelligence may change our future noticeably in a few years' time. However, it is at least questionable whether the cash registers will be ringing as early as 2024, after Adobe was recently unable to meet the high expectations for its artificial intelligence programs.

Of course, it is important to take a look at market technology, especially the forecast quality of the cycle analysis in 2023. "Under certain conditions, pre-election years have a hit rate of 100%, and the stock market year that is coming to an end has impressively confirmed this," says Franz-Georg Wenner from the Indexradar stock market service. US election years, on the other hand, often show an inconsistent development in the first six months with a low point in May.

This also fits in well with the current rather optimistic mood. Apart from a dip in September, the second half of the year is predominantly positive. From a purely statistical point of view, the stock market performs quite well, especially in the otherwise rather difficult summer months. The third quarter is by far the best in election years. The bottom line is that the probability of a profit for the year as a whole is just under 75%.

Daniel Saurenz runs the stock market portal "Feingold Research"