Monthly Report February 2024

Despite numerous gloomy economic forecasts, the major stock markets have kicked off the 2024 trading year on a positive note. By February 2, the MSCI World Index had gained 2.5%, with the broad S&P 500 in the US surging 4.0% to an all-time high, and the tech-heavy Nasdaq Composite rising by 4.1%. In Europe, the Euro Stoxx 50 advanced by 2.9%, and even the more defensive Swiss Market Index posted a gain of 0.9%. In Asia, the divide between China and Japan widened further. While the Nikkei 225 rose by 8.0%, the Shanghai Composite declined by 8.2%, and the Hang Seng in Hong Kong plummeted by 8.8%. Within the investor community, voices are growing, asserting that China is essentially “uninvestable”.

Many experts still linger in the camp of the hard landing recessionistas. They continue to forecast a hard landing leading to a recession, arguing that only in this scenario central banks could tackle the issue of high inflation rates effectively. Implicitly embracing the Phillips Curve model, which establishes a negative relationship between inflation and unemployment, these experts contend that only a recession resulting in higher unemployment and lower wage pressure can push inflation rates down. This perspective seems to overlook the currently high productivity rates.

Additionally, these experts mention geopolitical tensions, persistent supply chain constraints, and the time lag effect of monetary tightening as factors inevitably leading to a recession – and consequently, a stock market crash.

Contrary to many sentiment surveys and indicators suggesting almost greedy market behavior, the actual positioning in the futures market tells a different story. Speculative net positions in S&P 500 futures contracts have become even more negative in recent weeks. Net positions represent the difference between total long (buy) and short (sell) positions held by speculators. A positive net position indicates more long positions than short positions, implying a bullish sentiment in the market. Conversely, a negative net position signals a bearish sentiment.

On the seasonal front, we have less favorable developments to note. February is the second-worst month for the American S&P 500 Index in the last 100 years and the third-worst since the turn of the millennium. For the Nasdaq Composite, it is the worst month since 2000. However, the age-old market wisdom “As January goes, so goes the year” should not be dismissed lightly. With a notable gain last month, the outlook appears quite positive for the stock market in 2024 overall…

In our view, stock markets are in a sweet spot, and we anticipate further record highs in 2024. This can be attributed to moderate yet sustained economic growth, cooling inflation rates, and looming interest rate cuts by central banks.

Specifically, the following four reasons support the expectation of continued stock market gains:

1. Positive earnings outlook: During the ongoing earnings season, companies seem well-positioned to increase profits in a slowing but resilient economic environment in 2024.
2. New highs often lead to further gains: Historically, investments at new all-time highs have attracted additional gains. Data since 1970 show that a year after investing at an all-time high, the S&P 500 Index has risen more than 70% of the time.
3. Strong gains can follow strong rallies: Last year, the S&P 500 Index delivered a return of 24%. What happened after calendar years with rallies of 20% or more? Of the 14 other cases since 1970, 11 of them (almost 80%) ended higher in the following year. While past performance is no guarantee of future results, applying this trend to the 2023 year-end close of 4,770 would place the S&P 500 at over 5,400 by the end of December 2024.
4. Reduction of interest rates by the US Federal Reserve Bank: Interest rate-cutting cycles accompanying a soft landing have generally been a good time to invest. Since 1970, the S&P 500 has, on average, risen about 16% in the 12 months following the first Fed interest rate cut, provided a recession was avoided during that period. Moreover, five of the top ten years in the last 40 years for the S&P 500 occurred when the Fed cut interest rates without a recession: 1985 (26%), 1989 (27%), 1995 (34%), 1998 (27%), 2019 (29%).

At first glance, the “Magnificent Seven” (Mag-7) – the seven mega-cap tech stocks responsible for over 60% of the S&P 500’s return last year – may seem relatively expensive compared to the broad market. However, the valuations of the Mag-7 appear less exaggerated when considering their unique strengths: strong free cash flow growth, superior profit margins, and higher earnings expectations.

In summary, we anticipate a positive stock market year in 2024. Any weakness (in February 2024?) in stock markets will be utilized for additional purchases. The only situation that could genuinely go awry is a reacceleration of inflation rates while growth simultaneously falters. However, we see the likelihood of this scenario occurring at a maximum of 5-10%. For such a case, we hold a strategic allocation in gold investments.