Are we bracing for another downturn?

The stock market has started the calendar year in a correction mode. Beginning 2024, the S&P 500 saw its first downturn in ten weeks, triggered by the jobs report released on Friday. This dampened expectations for swift and substantial interest rate cuts by the U.S. Fed. The customary Santa Claus rally in December of 2023 was actually “Sell-On-Every-Rise”. During this period, the S&P 500, the Nasdaq and the Dow Jones saw mild cuts. 2024 is an election year, so expect heightened volatility going forward.

Investor confidence in equities

Investors display a notable shift in sentiment. Prolonged phase of elevated investor confidence marks the beginning of 2024. However, a potential retracement of over 10% at some point in the year can change market psychology. Will this retracement merely be short-term noise on the way to a rally above 5,000 points remains to be seen.

Cautious optimism across the world

Asian markets such as India, Japan are buoyed by Fed’s interest rate cut expectations and low inflation scenario in these countries. Investors here are maintaining focus on forthcoming inflation reports to gauge potential interest rate adjustments this year. However other Asian markets are on weak footing, taking cues from Wall Street’s muted close amid persistent uncertainty over early interest rate cuts by the Fed. European markets too are rangebound and hopeful of rate cuts by the BoE and the ECB.

From “recession” to “no recession”

In 2023, the market defied expectations. As we step into 2024, concerns linger about earnings and economic projections. The markets have gone from “recession” to “no recession” in no time. A downturn would force a recalibration of earnings, particularly since 2023 saw inflated multiples. This year’s elevated earnings estimates could falter if economic indicators continue to weaken, challenging market optimism.

Earnings growth too optimistic amid uncertainty

Stretched earnings expectations relative to historical norms pose a risk, especially as they struggle to match rising valuations. Factors like higher inflation, unemployment and interest rates could strain earnings. While some signs hint at economic softening, the slowdown, while not yet recessionary, might push rates and inflation downward, impacting market outlook.

Navigating uncertainties in 2024

A crucial consideration is that weaker economic growth won’t align with higher inflation and rates. If employment falters, it could drive slower growth, lower rates, and reduced inflation. This discrepancy might fuel potential investor disappointment and market repricing, adjusting valuations to match revised expectations. Monitoring data changes and adapting to evolving conditions become key strategies in navigating uncertainties in 2024.

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