For global investors, this has been a great year. Most major stock markets have surged, including those in the US, Japan and Europe. Alas, the laggard has been the UK’s FTSE 100, with only a slightly positive return.
International growth
The US is the largest stock market by far, accounting for up to two-thirds of global market value. The S&P 500 index has had an outstanding year, surging by 24.6%. Even better, the tech-heavy Nasdaq Composite has soared by 44.1% over 12 months.
Closer to home, the leading STOXX Europe 600 jumped by 12.8%, while Japan’s TOPIX index surged 25.1%. Meanwhile, the FTSE 100 closed 2023 just 3% higher, excluding dividends.
What am I worried about?
My biggest worry is that where the US stock market goes, others follow. And if America catches a cold in 2024, then other countries could start sneezing, despite the health of their own economies.
In particular, if the US Federal Reserve doesn’t cut interest rates as quickly as forecast, then US stocks could be on the back foot. Also, if the American economy does enter a recession, then falling company earnings could leave stocks looking overpriced.
Another worry is volatility, when financial markets swing violently. US stock volatility was very low in 2023, but spiked sharply in March and October. I don’t see 2024 as being as calm as this year turned out to be.
I’m also concerned by the dominance of the ‘Magnificent Seven’ mega-cap US tech stocks. These had an outstanding 2023, driving the US market close to 2021’s all-time high. If these giants stumble next year, then it could clobber investors’ portfolios (including my own).
On the other hand
I’ve called the stock market’s major turning points for four years running. But what if I’m wrong to be wary about 2024?
For example, if US earnings growth bounces back from this year’s weakness, then this could underpin higher valuations. Likewise, pre-election tax cuts in the US and UK might boost businesses, as would stronger global economic growth.
Another lift to stock markets might come from the return of global mergers and acquisitions (M&A) activity, which neared 20-year lows this year. Indeed, I expect to see several approaches for FTSE 350 firms next year.
UK shares look a bargain buy
This has been the best year for global stock markets since 2019 as stocks collapsed in the early Covid-19 crisis. As both stock markets and late-night parties have taught me, euphoria is often followed by a nasty comedown.
Then again, as a British investor, it’s unpleasant to see my home market falling behind international rivals. Yet the good news is UK shares have rarely looked cheaper.
Today, the FTSE 100 trades on a lowly multiple of 11.3 times earnings, delivering an earnings yield of 8.8%. Also, it offers a dividend yield of 4% a year, among the highest cash yields of major markets. That looks like bargain territory to me.
By contrast, US stocks look almost priced for perfection to me. The S&P 500 trades on a premium rating of 21.8 times earnings, producing a modest earnings yield of 4.6%. Also, its dividend yield is under 1.5% a year, although top US stocks usually offer low cash yields.
Hence, I see the Footsie as a massive bargain buy for 2024!
