My following worries mostly apply to the US stock market — by far the world’s largest. However, everything below can also apply to London shares. Let’s go!
12 big issues for stock markets
1. The Fed
The Federal Reserve — the US central bank — is the most powerful financial institution on earth. When Fed Chair Jerome Powell speaks, markets react. And if the Fed starts cutting interest rates in 2024, then global stocks could surge.
2. Volatility
Market volatility — as measured by the CBOE Volatility Index (VIX, now at 12.78) — is now at lows last seen in January 2020, just before Covid-19 sent stock markets into meltdown. I expect to see sharper market oscillations in 2023.
3. Crowded trades
I’m nervous of increasingly crowded trades and less diversification among investor portfolios. For example, in the elevated valuations of the Magnificent Seven mega-cap tech stocks. Also, highly leveraged US Treasury trades could crash, as they did in March 2020.
4. Liquidity
From 2008 to 2021, the world economy boomed, juiced by near-zero interest rates for far too long. With interest rates much higher, this ‘free money’ has dried up. Today, I worry about reduced liquidity making markets harder to navigate.
5. Leverage
I am really worried about leverage — investing using borrowed money or highly geared financial instruments. It’s everywhere I look: in stocks, bonds, commodities, and other markets. Alas, leverage is a double-edged sword that slices deep when prices plunge.
6. Valuations
Currently, the US stock market looks pretty expensive to me. The S&P 500 index trades on 20.5 times earnings, well above its historical average. Conversely, the UK’s FTSE 100 index is among the cheapest assets in the world today, being priced at a big discount of 10.7 times earnings.
7. Earnings
One reason why the US stock market looks expensive is that recently negative earnings growth has lifted earnings multiples. Accordingly, I’m hoping for solid earnings growth to support stock prices in 2024. Meanwhile, earnings keep rising for unloved UK shares.
8. M&A
This year saw a huge fall in global M&A (mergers and acquisitions) activity, especially in the US. When interest rates fall and borrowing gets cheaper, I’d expect this to ramp up. Likewise, I’m expecting plenty of tasty takeovers of undervalued FTSE 350 businesses.
9. Dividends
I’m a huge fan of share dividends, the passive income paid to shareholders by some companies. While the S&P 500’s cash yield is just 1.5% a year, the FTSE 100’s is a market-leading 4% a year. Therefore, I’m hoping for generous dividend growth over the next 12 months.
10. GDP
While broadly positive, the long-term correlation between GDP (gross domestic product) growth and stock-market returns is pretty weak. Nevertheless, decent economic growth in the US, UK, and elsewhere should help boost company earnings.
11. China
The ‘workshop of the world’ looked pretty weak in 2022/23. As the world’s second-largest economy (forecast at $17.7trn in 2023), China’s problems are all our problems. Thus, I’m hoping the Middle Kingdom’s property/banking meltdown recedes in 2024.
12. Elections
Finally, as the UK must have a General Election before 28 January 2025, this will likely happen in 2024. Meanwhile, the US Presidential Election is scheduled for 5 November 2024. I’m expecting fireworks at both.
Finally, I’m expecting higher returns from FTSE shares next year, but I’ve said this for years!
