Twelve months ago, Tom Lee bet that 2023 would go well.
While many of his Wall Street peers were sounding the alarm about a looming economic slowdown, Mr. Lee, a stock strategist who spent more than a decade running JP Morgan’s equity research before founding his own company, predicted in December 2022 that falling inflation and economic resilience would run counter to the generally bearish mood.
Mr. Lee was right. Despite brinkmanship over the national debt ceiling, a banking crisis in March, fears over the cost of financing the government’s budget deficit, a continuing war in Ukraine and a new conflict in Israel, the bulk of Mr. Lee’s prediction came true in 2023. Inflation has failed, unemployment remains low and the S&P 500 index has risen 25 percent.
Most investors disagreed with Mr. Lee’s prognosis; In 2023, they withdrew more than $70 billion from funds that bought U.S. stocks, according to EPFR Global data. Only a quarter of fund managers whose performance is benchmarked against the S&P 500 have beaten the index’s returns this year, according to Morningstar Direct.
“2023 was a year where people were so convinced we were going to have a recession and they looked at everything from that perspective,” said Mr Lee, head of research at Fundstrat. “Then there were people like us who said we didn’t know the future, but there was little evidence of a coming recession.”
As 2024 approaches, prognosticators tracked by Bloomberg more broadly share Mr. Lee’s optimism, including analysts at Citigroup and Goldman Sachs. Binky Chadha, an equity strategist at Deutsche Bank who bet against the consensus with Mr Lee last year, also predicts the bullish recovery will continue.
At the same time, analysts at Morgan Stanley, JP Morgan and others argue that the absence of a severe slowdown in 2023 does not mean it has been completely avoided, since the full effect of rising rates of interest continues to be felt on the economy.
“A lot of things have to go right to come out of this unscathed,” said Mike Wilson, chief equity strategist at Morgan Stanley. He revised his bearish bets in July, although even then he did not change his position that the economy would deteriorate.
At the center of both views is the evolution of inflation and whether the Federal Reserve can return the pace of price increases to its 2% target before the economy stumbles.
The Fed began curbing the economy in March 2022 by raising interest rates. But the central bank has recently expressed confidence that it is getting closer to its goal. The consumer price index rose 3.1% in the year through November, compared with a peak of more than 9% through June 2022. The core CPI, which excludes price volatility food products and energy, remains at 4%.
The sooner the Fed reaches its goal, the sooner it can begin to ease the brakes on the economy. The central bank recently forecast an interest rate cut next year. Even without a rate cut, lower inflation and historically high wage growth could encourage consumers to continue spending, providing a tailwind for corporate profits that would allow them to dream even higher, Mr. Lee.
Others are less confident. Although the job market remains strong, recent months have shown early signs of weakness, with unemployment rising slightly as more people begin looking for work. Credit card delinquencies and the number of people behind on their auto loan payments are also on the rise, with investors noting that consumer finances have become more strained after student debt forgiveness plans were repealed. . With inflation still above the Fed’s target, these cracks could widen over the coming year.
Jason Hunter, equity strategist at JP Morgan, said the market seemed to be ignoring the expected slowdown in growth next year. “The stock market seems to be expecting very optimistic results,” he said.
While the service sector of the economy, such as restaurants, has held up well this year, the manufacturing sector has struggled after a period of overproduction in 2022.
Energy stocks remain negative for the year, after being the strongest performers in 2022. Utility stocks – usually a safe haven when other segments of the market are in crisis, thanks to their steady revenue stream – have fallen by more than 10% since January. Small companies also suffered, with the Russell 2000 index still about 15 percent off its previous high and 18 percent higher for the year.
For Mr Lee and the growing herd of market bulls, these unloved areas of the market offer opportunity in 2024. A turning point in the manufacturing sector’s doldrums, as companies clear the inventory backlog and begin to move from new orders, could help companies in difficulty. in 2023 catch up.
Mr. Chadha of Deutsche Bank noted that economists had systematically underestimated the extent of economic growth this year. He thinks it might happen again.
“We think we will have positive growth surprises that will propel stocks higher,” he said.
Those who are more pessimistic say that a manufacturing recovery is far from assured and that declines in these market sectors in 2023 could be a warning that if not for a few giant technology stocks that have driven up the S&P 500, the stock market rally would be very different.
These tech stocks have been so dominant that they have even earned the nickname the Magnificent Seven. It’s a group that includes some of the biggest companies in the market: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. Without them, the S&P 500 would have risen about 10% this year.
“If mid-sized companies don’t see improvement, that poses a risk to me of a hard landing,” said Morgan Stanley’s Mr. Wilson. “If we’re going to have a recession, it’s going to be when these companies decide to start letting people go.”
For Mr Lee, history suggests a different outcome. When the S&P 500 has risen at least 15 percent for the year, which has happened 28 times since 1950, the index has risen another 10 percent the following year half the time and is positive more than 70 percent of the time, he says. he said. And when interest rates previously were between 3 and 5 percent, the stock market’s valuation was similar to what it is today, suggesting the rally is not overdone.
“People try to be too theoretical about the stock market,” Mr. Lee said. “Accepting chaos is a more correct way to approach the market. »
