I think a stock market rally in 2024 is a strong possibility. Cooling inflation, a potential peaking of interest rates and low valuations across many sectors lead me to believe this.
As a result, I’m preparing for an increase in share prices. This involves identifying stocks that I believe are currently undervalued and could outperform during a new bull market.
Inflation and interest rates
Due to cooling inflation, interest rates appear to have peaked, both in the US and UK.
Last week, the Bank of England (BoE) decided to hold rates at 5.25% for a second time after 14 increases. In the US, the Federal Reserve said it would keep interest rates between 5.25% and 5.5%.
The stock market is a forward-looking machine, with prices reflecting what investors think may happen to the economy in the future. If there’s further evidence that central banks’ rate-hiking campaigns really could be ending, this could spark a big rally in stocks.
Encouraging signs
We already saw early evidence of this breakout potential last week. The Dow Jones index had its best week since October 2022, rising 5%.
Meanwhile, the S&P 500 advanced 5.85% and the Nasdaq surged 6.61%. It was the best week in almost a year for both indexes.
Likewise, the domestically-focused FTSE 250, which has struggled for a few years, also had its best week in 2023. It rose 6% despite the general outlook for the UK economy remaining gloomy.
Low valuations
I reckon the FTSE 250 remains a good hunting ground for out-of-favour stocks. The index is still around 6% lower than it was five years ago.
In my eyes, investment trusts seem to have big rebound potential. Many are trading at a significant discount to the value of their underlying assets.
The Renewables Infrastructure Group and Scottish American Investment Company are two FTSE 250 trusts I’ve been adding to lately. Both boast tremendous dividend track records and have been trading at double-digit discounts.
Of course, if inflation remains stubbornly high in the coming months, then interest rates might not be lowered until 2025. In this case, both stocks could suffer further share price setbacks.
A big chance in US stocks?
I was interested to read bullish commentary from Richard Bernstein recently. He’s the chief investment officer of Richard Bernstein Advisors and former chief investment strategist at Merrill Lynch.
In a note, he wrote: “Investors generally continue to focus on the so-called Magnificent Seven stocks. Such narrow leadership seems totally unjustified and their extreme valuations suggest a once-in-a-generation investment opportunity in virtually anything other than those seven stocks.”
As a reminder, the ‘Magnificent Seven’ stocks are Alphabet, Apple, Amazon, Meta Platforms, Microsoft, Nvidia and Tesla. All have risen massively this year, largely fuelled by excitement around artificial intelligence.
However, Bernstein argues that a resilient economy could mean corporate profits are about to jump throughout the stock market. He sees investors flocking to attractively priced small-cap and mid-cap stocks, driving up their prices in a broad-based market rally.
Now, hardly anyone predicted the massive jump in stocks last week. Equally, nobody knows for certain where markets will head next. So that’s why I stay invested at all times, buying on dips and benefiting from market rises as and when they happen.
