Stock Market Growth Beyond the Magnificent Seven
From the strategy team of DJE Kapital AG
DJE's strategy team continuously monitors and evaluates the markets using its proprietary FMM methodology based on fundamental, monetary and market technology indicators.
Quite a few market participants expect the central banks to cut interest rates in 2024, in some cases rapidly. In our view, these expectations are probably too optimistic. 2024 is more likely to be a year of relatively high (economic) uncertainty on the markets, not least due to the many elections, including the US presidential election in November. In terms of sentiment (excessive optimism), the markets appear to be exhausted in the short term. However, we do not expect a massive slump in the markets, especially as growth is now being driven by more companies than just the "Magnificent Seven".
On the equity side, we believe that a defensive portfolio focussing on special situations is best suited to the market situation. On the bond side, we are also cautious, i.e. we do not consider duration increases to be appropriate, as bonds performed very well in November and December 2023. Gold remains an interesting addition.
- Bonds from investment grade with medium maturities and also selected longer-dated (government) bonds. Selected EM bonds (also in local currencies such as the Mexican peso)
- Shares in companies whose business model is largely independent of the economy and has high margins (and ideally also have a certain cost-cutting potential)
- Special situations such as artificial intelligence (AI) should also have a tailwind in 2024: North America thrives on genuine digital transformation; top technology companies will continue to invest massively in AI in 2024
- Insurance sector: relatively good visibility in terms of earnings growth, historically relatively good performance six months and also twelve months after the last interest rate hike
- Consumer staples and healthcare sectors: here too, historically relatively good performance six months and also twelve months after the last interest rate hike, consumer staples currently at a relatively high valuation discount; recently a lot of insider buying in the healthcare sector
- Market expectations regarding interest rate cuts by the US Federal Reserve (Fed) in 2024 appear too optimistic
- Deep and prolonged recession in Germany and Europe. This is weighing on stocks that are heavily dependent on German and European domestic consumption; the old German business model (cheap energy, well-educated people, good export markets) remains under pressure
- Industrial sector: order intake situation and therefore capacity utilisation could deteriorate in 2024
- Automotive sector: competition from Chinese suppliers will continue to increase in 2024
- Robust US economy so far, even without interest rate cuts
- Weak economy in Europe, therefore first interest rate cuts here
- Energy: demand and supply equally high
- China: no recovery for the time being
The US economy has also remained relatively resilient: consumer sentiment should also be quite good, as both property markets (US property prices have risen despite high interest rates) and the stock market have risen in 2023. If the US economy remains as stable as it currently is, key interest rates are unlikely to be lowered any time soon.
We expect economic development in Europe to be significantly weaker than in the US. In economic terms, key interest rates in Europe should fall sooner than in the US. The German economy is likely to remain under greater pressure in 2024: The former German business model, based on cheap energy, a well-trained workforce and good export markets, is under severe pressure and there is no new approach yet. The digitalisation of many production processes is not progressing well so far.
The demand situation on the energy market will remain good in 2024. Peak oil is also unlikely to be reached in the medium term. However, there is currently plenty of oil and gas on the market, which argues against a major price increase. In the long term, it is positive for the sector that there is currently little search for new oil fields and that large companies are focussing more on consolidation and cost reductions. In our view, difficulties will arise for the sector if prices structurally fall below USD 70/barrel, as fewer shares are likely to be bought back.
China: We do not expect a major economic revival for the time being. China is facing a major structural change and property prices are likely to remain under pressure in 2024. In the automotive sector, an aggressive export strategy by Chinese e-car manufacturers is to be expected. In our view, targeted stock picking is called for instead of betting on the broad Chinese market.
- Inflation in the USA and Europe under control
- Historically, the Fed does little in election years
Thanks to the most massive and fastest interest rate hikes in history, the Fed and ECB have largely brought inflation under control. From a short-term perspective, core rates (excluding the more volatile energy and food components) should be just 2% in Europe and 3% in the US. However, it is likely to be more difficult to reduce inflation in the USA from 3% to the target level of 2% than to reduce it from 10% to 3% ("last mile problem"). We consider an interest rate cut in the US as early as March to be unlikely. In addition, the next US president will be elected in November. Historically, the Fed has not done much in election years to avoid being suspected of interfering in politics or elections.
- Negative: Excessive optimism sets anti-cyclical sell signal
- Positive: Market breadth has improved
Sentiment indicators such as the Fear & Greed Index and the NAAIM Index (which shows the equity exposure of professional US investors) point to a very high level of optimism. Fund manager surveys, very low, in some cases negative cash ratios indicate that investors are fully invested. The danger is that even minor disappointments may be enough to tip the balance.
On the positive side, the market breadth has recently widened significantly. While the stock market in 2023 was primarily driven by the so-called "Magnificent Seven" - seven major US technology stocks - growth is gradually spreading further afield. 90% of S&P 500 stocks are currently trading above the 200-day line. In such a constellation, the index has always been higher one year later in the past.
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