Are Market Expectations Running Ahead of Economic Data?

As we look ahead to the year 2024, there are several key factors that are expected to significantly influence the stock market and overall economic conditions. Understanding the impact of inflation, interest rate trends, and economic data on market performance will be crucial for investors and policymakers as they navigate the complexities of the market.

At the moment, the market seems to be ahead of itself. Recently it was pricing in six (6) rate cuts for 2024. Stronger than expected economic data such as the CPI and PPI Reports (Consumer and Producer Price Inflation respectively), plus resilent US retail numbers and a stronger Jobs Report have barely dented these expectations.

In fact, the futures implied rate for rate cuts has only gone down to 5.7 cuts for 2024. Thus, we ask the question are we headed towards reality with a drop in stock prices in the near term with key earnings reports coming up soon?

A recent article in the Financial Times (FT) titled, ‘If spot bitcoinn ETFs are so great whys the bitcoin price down?’, highligts this tug of war between risk-on and risk-off. A chart is included below:

In addition, just a couple of days ago stocks fell as the Financial Times (FT) article titled, ‘Global Stocks Drop as Hopes Fade for Early Interest Rate Cut’ states that the market is too rosy in its outlook.

Furthermore, I took a look at Apple and NVDA stocks as sort of key stocks for the risk-on crowd. Apple increased by almost 4% yesterday based on a stock report that VR headsets will somehow make up for slowing phone sales, really? The VR Pro at about $3500 is really a niche category thus assumptions here are questionable since this valuation assumes a mass category. NVDA has benefitted from several good news stories lately but barely move up following the Taiwan Semiconductor (TSMC) market outlook.

See charts of Apple and NVDA below:

NVDA Stock Chart for January 18th 2024

Apple Stock Chart for January 18th 2024

If rates are expected to stay higher for longer and with the first rate cut being pushed back, then investors will have an incentive to stay in bonds longer. Looking at the charts carefully, you will see that the volume is not there and I expect a reversal in the short term. Apple has its earnings call on the 25th of Janaury and NVDA is sometime in mid Feburary.

The bar for positive suprises is much higher thus we think the room for error is small.

What are the Key Factors Affecting Stock Market in 2024?

One of the key factors influencing the stock market in 2024 is the impact of inflation. Inflation can erode the purchasing power of consumers and affect corporate profitability, which in turn can impact stock market performance. Investors will closely monitor inflation trends and the actions of central banks to gauge the potential impact on equity market conditions.

Another critical factor is the relationship between interest rate trends and stock market performance. The Federal Reserve’s decisions regarding interest rates can have a significant impact on market expectations and asset valuations. Investors will carefully evaluate the outlook for interest rates in 2024 and its potential effects on various asset classes.

Economic data, such as GDP growth, consumer price index, and labor market statistics, will also hold considerable influence over sector performance in the stock market. Investors will rely on economic projections and market news to assess the potential impact of economic data on market conditions.

As mentioned earlier, if interests stay higher for longer, then money will stay in bonds earning a return of 4-5%. This means that market expectations for the stock market will come down plus we should expect volatility to be higher due to uncertainty.

How Will a Recession Impact Market Expectations for 2024?

The recession is expected to have lasting implications for market expectations in 2024. One of the key considerations is the forecast for earnings growth in the aftermath of the recession. Analysts and economists will closely examine earnings projections to gauge the potential resilience of corporate performance in the year ahead.

Expectations for different sectors amidst the recession fallout will also be a focal point for investors. Certain sectors may demonstrate more resilience in the face of economic challenges, while others may face greater headwinds. Understanding the sector-specific outlook will be essential for investors seeking to navigate market conditions in 2024.

Analysis of economic growth trends in emerging markets will also be a key consideration for market participants. Emerging markets can offer significant growth opportunities, and understanding the economic landscape in these regions will be critical for investors seeking to capitalize on global market conditions.

Thus, the key to 2024 will be earnings reports, sector rotation and emerging market opportunities.