U.S. Presidential Elections: Market Insights and Analyst Predictions
As the U.S. presidential elections loom just 12 months away, a retrospective analysis of the S&P 500's performance over the past four decades reveals a notable average gain of approximately 4%. Delving deeper into the historical data from 1932 to the present, the year preceding the elections has seen an average S&P 500 return of 7%.
During this period, defense industry stocks have consistently shown robust performance, while technology shares have exhibited the poorest performance, with an average decline of 5%. Despite some inconsistencies, scrutiny of the Federal Reserve's (FED) expectations and the CME FedWatch Tool suggests an anticipation of at least one interest rate cut in one of the five meetings marked in red for the year 2024.
While inflation retreats, the strong stance of the job market, coupled with the potential impact of the asset effect attributed to the appreciation of risky assets, hints at the political nuances surrounding the FED's decisions. It is plausible to argue that the FED's choices may be somewhat politically motivated, aiming to prevent the current political authority from facing unfavorable outcomes in the elections.
In a world where inflationary factors akin to those of globalization persist, a shift in monetary policy by the FED to stimulate the housing market, boost consumption, and replicate the wealth effect generated by the stock market could lead the U.S. into another bout with inflation by 2025.
A historical examination of the S&P 500's response to FED interest rate cuts over the past 42 years reveals seven instances of policy changes, resulting in a 57% chance of a downturn in the S&P 500. Therefore, a simplistic analysis suggesting that a FED interest rate cut will automatically propel the markets upward may lack statistical merit. Vigilant monitoring of the markets remains crucial for determining the direction.
Option-Based Volatility Amid Holiday Lull
As the Western financial sphere winds down for the Christmas break, we find ourselves entering a period characterized by a significant reduction in liquidity, reaching levels as high as 50%. In this context, it is logical to expect a decrease in volatility for the S&P 500 and an increase in volatility for Bitcoin and altcoins in the lead-up to the decision on spot bitcoin.
Moreover, significant open positions are observed in structured derivative products, especially options used by institutional investors in the U.S. to manage risks. Therefore, as we return from the holiday break, it is advisable to closely monitor the week of January 15-21 in the SP500 and NASDAQ markets and position ourselves intelligently against the potential volatilities that may arise during this period.
Strategists Exercise Caution in Approaching 2024
The consensus among U.S. stock market strategists for the S&P 500 index in 2024 is notably elusive. Average target prices predict a modest 2.4% increase in the index over the next 12 months, reflecting a cautious outlook compared to historical standards.
Individual strategist targets for the S&P 500 in 2024 vary significantly, with a 28% difference between JPMorgan's target of 4,200 and Yardeni Research's target of 5,400. However, the past performance of individual strategists tends to be less consistent than average predictions.
Drawing Lessons from the Past: Strategists' Forecasts
Strategists' annual forecasts often correctly predict the market direction, albeit with the ease of predicting gains each year. The market has historically risen more often than it has fallen, with two out of three years showing an upward trend.
Initial average forecasts made at the beginning of the year often deviate significantly from the year-end results. Even active trading based on strategist targets (selling above the target, buying below) tends to result in significant underperformance compared to a buy-and-hold strategy.
Possible Optimistic Scenarios: Bull Case for 2024
An optimistic scenario for 2024 could be supported by continued growth among market leaders, positive signs of better-than-expected earnings, and the recovery of laggards as fears of a recession diminish, coupled with improvements in key cyclical categories.
Investors often consider risk management as protection against potential major crises, such as T-bills or protective put options. However, there is also a significant risk in missing out on a major rally, and assuming that a rally cannot occur due to the lack of imagination among strategists can be misleading.
Bank of America's Picks for 2024: Top 5 Stocks
Analysts at Bank of America have unveiled their highest-rated stocks for 2024, expressing confidence in the advantages and strategic positions of these companies in a volatile macro environment.
1. Amazon
2. AT&T
3. General Electric
4. Tenet Healthcare
5. Union Pacific
Amazon anticipates margin expansion in 2024 through the optimization of its logistics network and increased revenues from Amazon Web Services (AWS). The company aims for a 5% GAAP operating profit margin in the North American retail sector, driven by the growing use of its logistics network and advertising growth.
AT&T has reshaped its wireless strategy, regaining subscriber growth. With increased free cash flow and an improved dividend coverage, the company expects FFO growth and support for declining capital expenditures.
General Electric plans to focus on the aviation sector in 2024, transforming into a company centered on a single area. The company is set to spin off its energy and renewable energy segment, Vernova, in the spring. With increasing profits in the aviation sector and reduced losses in renewable energy, a 59% earnings per share growth is projected.
Tenet Healthcare aims to generate significant free cash flow in 2024 by focusing on Ambulatory Surgery Centers (ASC) with low capital intensity and robust cost control.
Union Pacific, under the leadership of new CEO Jim Vena, prepares for a substantial rise by enhancing service quality and surpassing volume targets. The company expects sustainable mid to upper-level earnings growth, exceeding operational margin expectations.
