More Bull Market in Store for 2024

After stocks’ big 2023, and with them hovering around January 2022’s record high, investor sentiment is at an interesting place. People aren’t outright bearish, but expectations aren’t high. Instead, there is a lot of talk about what supposedly needs to happen for stocks to have even an ok year after last year’s sharp recovery, including rate cuts and rising corporate earnings. This skepticism is just one reason we think the bull market will march on in 2024, delivering a good-to-great year for global stocks.

An age-old myth about markets is that they need catalysts—concrete reasons—to rise. It is hard for many to fathom that, left to their own devices, stocks’ natural tendency is to grow. But that is what we have found. It isn’t that stocks need reasons to rise, but rather, that if there are no reasons for them to suffer, they will probably do ok at least. Said differently, if you aren’t in a bear market, you are in a bull market. So absent a good reason to be bearish, being bullish is usually the right move.

Bull markets usually end one of two ways. One, they peter out once stocks have climbed the wall of worry and sentiment has spiraled into euphoria, causing expectations to run hotter than reality can keep up with. This is when investors tend to overlook simple recession warning signs, convinced stocks can run forever, setting up a bear market as stocks price the coming disappointment. We aren’t there now, not with people thinking stocks are up only because the Fed might cut rates this year or only because they are anticipating an earnings recovery that might not come. Using Sir John Templeton’s sentiment framework—based on his observation that “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”—we are in the skeptical phase right now, with plenty of wall of worry to climb.

The second bear market cause is what we call the wallop. That is, a huge, unseen negative shock capable of knocking the global economy into a recession, which would mean deleting a few trillion dollars of economic activity. COVID lockdowns are almost too good an example, given most wallops wouldn’t even strike with that kind of speed. We always scan for such risks, but the only negatives on the horizon right now are either too small, too widely known or too misperceived to knock stocks back into bear market territory. The global economy has already proven it can grow through Fed rate hikes and inverted yield curves. Wars in Ukraine and Gaza, while tragic, are incidental to global commerce. Businesses are adapting to shipping disruptions in the Suez Canal, and freight rates remain well below 2021’s highs.

Which brings us to one of the best things about 2024: Because it is a US election year, politicians almost certainly won’t throw up new roadblocks to stocks’ rise. Election years tend to be bullish. The S&P 500’s average election year return since 1925 is 11.4%, with returns up 83.3% of the time.^[i] But less known is why this happens: gridlock, which usually gets a big boost from midterms (hence year three also being up the vast majority of the time) and extends into year four as campaigning takes over. Not only do legislators up for re-election not want to rock the boat by passing something big and contentious, but they also prefer saving wedge issues for fundraising and stumping. Hence, we get a year of big promises and rhetoric but relative inaction, punctuated by the presidential election delivering a winner—which normally eases uncertainty regardless of party or personality.

So while we don’t think stocks need reasons to be bullish, we think the election year and its attendant gridlock is a pretty darned big one. Gridlock can be annoying since it means politicians getting paid to bicker, but stocks love it. Even well-intended and supposedly pro-business legislation can create winners and losers, stoking uncertainty and discouraging risk-taking. When Congress is gridlocked, that uncertainty leaves, freeing businesses to plan and invest. Happily, this year gridlock is a global phenomenon, thanks to thinly stretched coalition governments throughout Europe, a pending-but-unscheduled election in the UK and a financial scandal threatening Japan’s government. All are recipes for legislative inaction.

As for economic fundamentals, they look pretty good. Yes, there are weak pockets including Germany and the UK, but these have been discussed ad nauseam for over a year and a half now. The surprise power is sapped, in our view—helping explain why both markets hit new highs on a local currency basis recently. Seems to us recession risk is known and priced, making mild downturns (should they continue) unlikely to present new threats. People who wanted to sell stocks on recession risk did so long ago.

Meanwhile, in the US, since inventories and government spending played a big role in GDP’s hot Q3, we wouldn’t expect the 4.9% annualized rate to continue. But the pure private sector components did a-ok, with consumer spending, business investment and even real estate contributing nicely. All three regional Fed branches that publish “nowcasts”—estimates of yet-unpublished quarterly growth based on incoming data—point to growth in Q4 of between 1.8% and 2.5% annualized.^[ii] Those estimates aren’t perfect, of course, but they suggest America’s economy grew at rates similar to those seen in early 2023 as the year closed. This probably continues in 2024 as wage increases continue restoring households’ purchasing power, somewhat lower mortgage rates encourage home construction and businesses regain a growthy mindset after two years of cost-cuts and layoffs in anticipation of a recession that never arrived.

For the early parts of this year at least, we think Tech, Tech-like industries in Consumer Discretionary and Communication Services—and other growth-heavy industries—probably continue leading. The slow-growing global economy and inverted yield curve favor businesses whose revenues don’t depend on fast growth and who can use their size and pristine balance sheets to get funding in capital markets. But if the yield curve re-steepens later this year, it could tee up a value shift. In addition to triggering a global reacceleration—benefiting more cyclical companies—it could also improve bank lending (widening the gap between short and long rates makes lending more profitable), which would potentially pump more financing to smaller firms. Now, this isn’t assured, since the inverted curve didn’t hammer lending as it usually would. Banks’ deposit glut kept their funding costs low. So rate cuts and a steeper curve might not turbocharge lending. But it is a possibility worth bearing in mind and watching for.

Overall, though, we see good things in store in 2024. Stocks may be near record-highs, but it is very normal for markets to notch many new records during a bull market’s lifespan. Volatility and a correction are always possible, at any time and for any or no apparent reason, but they are normal and expected in bull markets—the price we all pay for stocks’ long-term returns. So take a deep breath and enjoy another bull market year.