We are now officially one week into 2024. Hopefully, you feel well rested, and ready to focus on the year ahead. Following the infographic of events to stress test, which we shared before the holidays, we have compiled a list of five considerations, derived from our proprietary risk analytics and models, along with other market intelligence, to help guide your 2024 views.
- Soft landing incoming: The odds are that the Fed will no longer need to raise interest rates from their current levels. Instead, it will be looking to engineer a soft-landing while still maintaining tight enough monetary conditions to allow inflation to continue its decline towards the 2% target without causing a hard-landing. This would be the ideal scenario for equity markets. If we enter a true recession and rates fall, then stocks may not fare so well in the short-term. Whereas if the economy remains robust (and the recent jobs report suggests it may), then we may stay in the “higher for longer” rate cycle, with inflation still managed well.
- Return of (macro) visibility and confidence: Volatility ended 2023 at roughly median levels, compared with historical data. This is good news, as we believe if volatility is too low, it lulls investors into a false sense of security (as we have previously written about) and if it is too high, it will scare investors away from equities. While we hope that volatility spikes caused by geopolitical events will be minimal, we recognize that there are unknown unknowns we need to plan for (that’s where stress testing comes in). Still, we expect Market Sensitivity and Volatility factors to perform well in 2024 (in other words, higher beta and higher volatility stocks will outpace their counterparts) and that our risk-on strategies will finally outperform risk-off ones, as fears of a steep recession fade and equities rise.
- Back to fundamental investing: In 2023, a very narrow segment of the market outperformed, as indecision and fear led most investors to remain huddled around a small group of seemingly defensive stocks. These are expensive now, so markets will have more breadth in 2024, with most or all segments participating in rallies. This is especially true if the economy remains resilient and more and more sectors benefit from this strength. As a result, we expect the diversification risk premium to outperform the concentration risk premium.
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- The types of stocks to watch: While most of 2023 was dominated by the Magnificent Seven, we saw this shift to better performance in smaller names, higher beta and higher volatility, and less profitable companies, at the end of 2023. If this continues into 2024, then the road less travelled will be a more profitable option for investors, as this is where they will find lower valuations (i.e. bargains).
- Hope may turn into confidence: But of course there are caveats. Geopolitics, for one, could reignite energy prices, which are a key driver of inflation. There may also be some inflation reports higher than the 2% target for the next few months, which could spook investors. The Fed continues to walk on the tightrope mentioned above. But whether or not your high- conviction ideas tally with ours, this list of ideas for stress testing the known unknowns can at least help you prepare for what’s to come in 2024.
Enjoyed these highlights? Register to receive the latest Equity and Multi-Asset Class Risk Monitors and ROOF sentiment scores direct to your inbox. Or, join us at our next Axioma Insight Risk Review webinar on January 10, when we will go into more detail on what’s to come.