[Global Focus] US Interest Rate Cuts and Economic Soft Landing Expectations... Is 2024 the Year of the Ox for Wall Street?

Tech Stocks Surge with Nasdaq Up 43% Last Year
Rally Expected This Year Amid Interest Rate Cut Possibility

Bond Prices Rise as Rates Fall
Goldman Sachs Calls This Year "The Year of Bonds"
Market Optimism May Be Excessive Variable

Cryptocurrency Volatility High, Caution Advised
Gold Hits Record High, Uptrend Expected to Continue

"The year 2023 was one in which most asset market investors did not fail."

The American daily Wall Street Journal (WSJ) evaluated last year's asset market as having "continued a large-scale rally due to expectations of interest rate cuts by the U.S. Federal Reserve (Fed) in 2024." This assessment applied regardless of stocks, bonds, cryptocurrencies, or gold. The market was greatly stirred from the end of October last year as expectations grew that the Fed would end its aggressive benchmark interest rate hikes over the past two years and shift to cuts. Can the asset market this year, when the Fed is expected to actually cut rates, be filled with a 'rosy outlook'? While optimism is rapidly spreading alongside expectations of a soft landing for the U.S. economy, pessimistic views also coexist, warning that the accumulated effects of tightening may appear belatedly.

[Image source=Yonhap News]

◆ Will the U.S. stock market continue to run this year... The key is a soft landing = Investors’ attention turns to whether the U.S. stock market can enjoy a boom again this year following last year. Last year, the U.S. stock market rose sharply. With technology stocks showing strength, the Nasdaq Index and the S&P 500 Index rose 43% and 24%, respectively, over the year. The tech-heavy Nasdaq Index boasted its largest increase in 20 years since 2003 (50%), and the large-cap-focused S&P 500 Index was on the verge of surpassing its all-time high (4796.56) recorded on January 3 last year. The blue-chip-focused Dow Jones Industrial Average rose 13% during the same period and has been hitting record highs daily since December last year. The rally was led by big tech stocks known as the 'Magnificent 7,' and the market cheered after Fed Chair Jerome Powell signaled rate cuts in 2024 immediately following the Federal Open Market Committee (FOMC) meeting on December 13. At that FOMC meeting, the Fed lowered its year-end rate forecast for next year from 5.1% to 4.6% on the dot plot, implying about three rate cuts next year.

Whether the U.S. stock market can rally again this year depends on whether the U.S. economy can achieve a soft landing. The key is whether inflation can reach the Fed’s target of 2.0% this year. The slowdown in inflation is positive. The core Personal Consumption Expenditures (PCE) price index, which the Fed closely watches, rose 3.2% year-over-year in November, the lowest level since April 2021. As the labor market cools, wage growth is also slowing. The Employment Cost Index excluding bonuses, one of the U.S. wage growth indicators, slowed to 4.3% in Q3 last year from 4.5% in the previous quarter. JP Morgan and Goldman Sachs forecast that inflation rates in major countries including the U.S. will approach the central banks’ 2% target by the end of 2024. JP Morgan noted, "Historically, when inflation runs in this range, the average return of the S&P 500 Index has been about 14%."

A few Wall Street experts who correctly predicted a bull market in the U.S. stock market at the beginning of last year also forecast that "the bull market will continue" this year. Ryan Detrick, Chief Market Strategist at Carson Group, expects a strong U.S. stock market this year as well, but anticipates that some of the stocks that underperformed last year?not technology stocks?will post low double-digit returns. He advised, "Look at small-cap, mid-cap, and financial stocks."

◆ With expectations of rate cuts... "This year is the year for bond investment" = Global investors aiming to invest in bonds, including U.S. Treasuries, are also increasing due to expectations of a Fed pivot (direction change). When interest rates fall, bond prices rise. The U.S. 10-year Treasury yield, the benchmark for global bond yields, experienced a rollercoaster ride last year. The Fed’s outlook for prolonged high rates combined with the U.S. government’s fiscal deficit and increased Treasury issuance caused the 10-year yield to surge from late August and surpass 5% at the end of October for the first time in 17 years. However, inflation slowdown and dovish remarks by Fed Chair Jerome Powell quickly fueled market expectations for rate cuts, and the yield closed below 3.9% at the end of last year.

Anish Shah, Chief Investment Officer (CIO) of Public Investments at Goldman Sachs Asset Management, said, "Inflation and growth are slowing," and forecasted that "2024 will be the year for bond investment." There are also predictions that U.S. Treasury investment returns will exceed 10% this year. Ira F. Judge and Will Hoffman, strategists at Bloomberg Intelligence (BI), Bloomberg’s economic research arm, predicted, "Given the expected tepid recovery after a recession, U.S. Treasuries will record double-digit returns in 2024."

However, some caution that bond investment should be approached carefully, warning that market expectations may be excessively high. The speed of the Fed’s rate cuts is a variable. Pravin Korapati, Goldman Sachs’ Chief Rate Strategist, expressed concern to Bloomberg News, saying, "The market is betting too much on an early easing of monetary policy."

◆ Cryptocurrency market also stirs... Will gold prices rise further? = What about the cryptocurrency market? Last year, Bitcoin prices more than doubled on expectations of spot exchange-traded fund (ETF) listings. According to Upbit, Bitcoin reached a yearly high of 61,312,000 KRW on January 8. According to major foreign media, the U.S. Securities and Exchange Commission (SEC) is expected to approve Bitcoin spot ETF applications from about ten asset management firms including BlackRock by the 10th at the latest. This would increase the likelihood of approval for spot Ethereum ETFs and enable more institutional investors to enter the cryptocurrency market. On the back of expectations for further Bitcoin price increases, Cathie Wood, CEO of Ark Investment and known as 'Donnamu Unni' (Money Tree Sister) in Korea, purchased an additional 4.32 million shares of Bitcoin futures ETFs on December 27.

However, Wall Street experts recommend limiting cryptocurrency exposure to about 1-5% of total asset investments. Brian Armour of Morningstar North America emphasized, "Bitcoin remains an extremely volatile and speculative asset."

Gold prices, which hit record highs last year, are also expected to remain strong this year. The U.S. interest rate cuts and a weaker dollar are forecasted to be factors pushing gold prices higher.

Gold [Image source=Yonhap News]

◆ U.S. recession concerns remain a variable = Just as last year’s Wall Street experts’ predictions of U.S. economic slowdown and a Fed pivot were completely off, the U.S. economy and asset markets this year may also unfold differently from forecasts.

For now, the market pins hopes on optimism that the U.S. economy will achieve a soft landing this year. Despite the Fed’s high-intensity tightening slowing inflation and the labor market, the U.S. economy remains resilient. The U.S. GDP growth rate in Q3 last year was 4.9%, the highest since Q4 2021. However, the 'head fake' phenomenon (a sudden reversal in financial market indicators) cannot be ignored. The slowdown in inflation has stalled, and wage pressures persist, posing risks. Market expectations for the Fed to start cutting rates in March are spreading rapidly, but this could overheat the asset market and delay the timing of the Fed’s rate cuts.

Wall Street experts also warn of the possibility of a recession next year. If the U.S. economy enters a recession, the asset market cannot avoid weakness. Dana Peterson, Chief Economist at consulting firm The Conference Board, forecasted, "There is a possibility that the U.S. economy will enter a mild recession early next year."

This content was produced with the assistance of AI translation services.