In 2023, the main topic at the beginning was the highly anticipated economic recession in the USA, which did not occur. March 2023, when American regional banks began to collapse, was supposed to be the trigger for the recession. However, the United States government, in cooperation with the Federal Reserve System (Fed), intervened and hundreds of billions of dollars were printed to save the banking sector. And successfully, the crisis was subsequently averted. March was also the month when investors realized that the economy was teetering on the edge of the abyss, and therefore most of the capital since then went to "safeties", or the largest 7 traded companies in the market. This group of tech giants generated most of the stock market gains last year. Towards the end of 2023, this situation improved and other titles joined the growth in response to expectations of lower interest rates and earlier than originally expected.
Inflation in recent months has been surprisingly moderate and follows a healthy downward trend (core less). US headline inflation in December was just 3.1% year-on-year and core 4.0%, unchanged from November. In the eyes of investors, this leads to an early start of Fed interest rate cuts (as early as March), which should translate into stronger economic growth in the coming years. In response, speculative stocks, smaller growth technology companies and cyclical stocks experienced very brisk growth in November and December. However, the question arises as to why inflation is so moderate and why the US Fed, although it claimed back in November that lowering rates was out of the question, reversed itself very quickly in December. Now, according to the latest FOMC meeting minutes, officials expect at least 3 rate cuts in 2024 (by 0.25% each time). One of the leading theories claims that the reason why inflation is in rapid decline and the Fed is now more inclined to cut rates is the ailing economy. Many historically accurate economic indicators suggest that the US will not avoid a recession. The problem with the fundamental historical analysis of the stock markets is that it does not account for the large fiscal interventions in the economy that we have witnessed in 2023. All this creates the feeling of artificially sustained economic growth before the elections in November 2024, while below the surface economic activity is slowly degrading. In recessionary themes, defensive and non-cyclical titles are more successful, typically the healthcare sector, the essential consumption sector or public infrastructure. Usually gold, or corporate, and especially government bonds also do well.
In the "reinflationary" scenario, the growth of the price level will not be able to be stably kept at an acceptably low level, and because of this, inflation may reawaken. This is likely to happen if US fiscal policy becomes too generous, or if the Fed starts cutting rates too fast and too soon. Under these conditions, the US economy would continue to avoid recession because economic activity would be too strong. But in such a case, the Fed cannot significantly reduce interest rates. It could even decide to raise them again if inflation proves persistent. Bond yields would thus remain higher for a longer period of time, but this would also have a depressing effect on the economy in the longer term. This is because many companies have cheaply fixed debt in 2021 and 2022, making them less affected by higher interest rates. The price of debt depends on the yields on bonds, so if these yields are higher for a longer period of time, then more economic subjects will end up with more expensive debt. The theme of reinflation will be unfavorable for companies sensitive to higher interest rates and for those that cannot pass costs on to their customers. It may also not be favorable for smaller and growth companies, as they often rely heavily on short-term debt. Conversely, larger companies with a solid foundation, selected cyclical titles in the sectors of energy, basic materials, or industry could do well.
Soft-landing is a vaguely defined term that usually refers to a situation where the economy avoids economic recession after a period of rising interest rates. At first glance, this may not seem like something that deserves its own expression, but after a historical analysis it would be clear to him that this is a relatively rare phenomenon. Historically, a steep rise in interest rates has caused delayed recessions and stock market sell-offs. The recession would probably arrive this time as well, already in March. But rich government incentives change a lot, so no one really knows what will happen next. Markets have been experiencing this soft landing scenario intensely for at least the last 2 months. In this scenario, investors are betting that interest rates will go down sharply, along with inflation, and that economic growth will remain positive, without a significant rise in unemployment. So this theme is the assumption that everything will return to the old order, as it was in the time before the pandemic. It's not hard to deduce which stocks are doing well when investors gravitate to this sentiment, just look at what has risen in recent months. These are cyclical titles, sensitive to interest rates, the sectors of essential consumption, technology and innovation or real estate are doing well. Smaller growth companies and companies with worse balance sheets and more debt are also doing well. Bond yields should fall in this scenario and their prices should therefore rise. On the contrary, precious metals such as gold or bonds with a lower yield might not be attractive options.
These 3 themes are likely to resonate in the new year of 2024. Depending on economic data and sentiment, investors will shift their portfolios in proportion to how much they believe in which theme. In 2022 and 2023, the recession theme first dominated, which gradually transformed into a reinflation theme, and at the end of the year, and today, the last theme of soft-landing dominates. Investors may swing between these sentiments more dynamically this year than they have so far, largely because of the widening gap between what is "natural" and what is now "forced" for political reasons. Markets are currently very bullish and strongly believe in a soft landing. Usually, a period of extreme optimism is followed by a period of sobriety, when depending on the economic data, investors may lean towards a recessionary or reinflationary theme. Whoever can correctly predict the transformations of these market sentiments can also predict the price movements of the mentioned assets.