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Signs of exhaustion emerged after an over $8 trillion surge in the S&P 500 this year, with the gauge still notching its ninth straight week of gains. Traders have looked past US Federal Reserve uncertainty, recession angst and geopolitical risks. And many who came into 2023 dreading all that have ended up scrambling to chase the rally.
“The market shows signs of fatigue and undoubtedly needs to consolidate,” said Quincy Krosby at LPL Financial. “As long as participation remains broad, the bullish sentiment should carry the indexes as they navigate geopolitical and domestic scenarios, and an overarching positive consensus that 2024 will be a similarly strong year.”
Investors will be monitoring Chinese exporter-oriented Caixin manufacturing data later on Tuesday after President Xi Jinping used his annual new year address to pledge strengthening of economic momentum and job creation, while acknowledging some companies and citizens had endured a difficult 2023.
“We will consolidate and strengthen the momentum of economic recovery, and work to achieve steady and long-term economic development,” Xi said in the televised message on Sunday, beamed to his nation’s 1.4 billion people. China’s much-anticipated post-pandemic economic boom failed to materialise in 2023.
Meanwhile, energy markets may be impacted by Iran dispatching a warship to the Red Sea after the US Navy destroyed three Houthi boats, a move that risks ratcheting up tensions and complicating Washington’s goal of securing a waterway that’s vital to global trade.
Oil posted its biggest annual drop since 2020 as war and OPEC+ production cuts failed to propel prices higher in a year dominated by supply growth outside of the grouping. Emerging-market currencies closed out their best year since 2017 as the outlook for lower interest rates in the US revived investor appetite for risk.
A Houthi helicopter approaches a cargo ship in the Red Sea.Credit: AP
Trading has been fuelled by the artificial-intelligence boom, stretched positioning and the “fear of missing out”, with the S&P 500 soaring 24 per cent in 2023, while the Nasdaq 100 had its best year since 1999. Chipmakers saw their biggest annual gain in more than a decade, led by major AI players Nvidia and Advanced Micro Devices.
Equity markets have gone up so quickly that they’re highly vulnerable to a pullback if the US economy slips into even a mild recession, according to RBC Global Asset Management. Rate cuts are likely to happen in 2024, but the global economy hasn’t yet absorbed the full impact of almost two years of tightening, RBC economist Eric Lascelles said.
“What’s baked into the cake is a sizable jump in earnings, which is really only achievable in a soft-landing scenario,” Lascelles said.
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Following a nine-week winning streak, the S&P 500 has posted average and median 12-month forward returns of 8.1 per cent and 12.2 per cent, respectively, Turnquist said, citing data going back to 1950. Seven out of nine occurrences produced positive results, he noted.
After a year of massive swings and numerous head fakes, the US 10-year yield ended 2023 pretty close to where it began. It’s an almost farcical conclusion to 12 months of trading that saw it tumble to as low as 3.25 per cent in the wake of March’s banking crisis – only to surpass 5 per cent just a few months later.
Key inflation data endorsing a growing narrative that central bankers will aggressively cut rates in 2024 fuelled solid gains for both equities and bonds in the last two months. The rally was also driven by US Fed Chair Jerome Powell’s dovish pivot at the December policy meeting.
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