Compared to a few years ago, 2024 has been a far more enjoyable year for investors. Over the last couple of months, the total shareholder returns of the FTSE 100 and FTSE 250 are firmly moving in the right direction. And zooming out even further from late 2023 reveals double-digit returns for both indexes.
Despite this upward trajectory, many UK stocks continue to trade firmly below 2021 levels. But that may soon change. The improved economic outlook is leading to increasingly bullish analyst forecasts, especially in the second half of 2024.
The case for a market rebound
With inflation now sitting at 4%, the Bank of England is looking increasingly likely to announce interest rate cuts as we move into the second half of the year. And it seems the Federal Reserve in the US is likely to do the same.
For businesses, that’s terrific news. Apart from lowering the cost of debt here and abroad, such a move would ease pressure on household budgets, re-sparking both economic and share price growth.
Considering the UK has been in a technical recession, seeing GDP move back in the right direction will obviously be an encouraging sight. However, looking at the history of the stock market, a strange pattern emerges — when a recession starts, the stock market often goes up.
It’s important to remember that investors, even short-term ones, are forward-thinking. As such, expectations of negative impact from a recession are usually baked into stock valuations before they occur. Subsequently, when one does materialise, and uncertainty about its severity is eliminated, valuations get adjusted upwards as the outlook improves.
Does this mean the second half of 2024 is guaranteed to deliver spectacular returns? Not necessarily.
Investors still need to manage risk
There are a growing number of early indicators that a recovery is looming. However, there’s also no shortage of hurdles that have yet to be overcome. In the UK specifically, the political landscape is proving quite tumultuous.
Without getting political, the current government appears to be losing support with a general election just around the corner. Most polls now indicate the Labour Party is on track to take power which could introduce a significant shift in Britain’s fiscal policy.
In the long run, these changes aren’t all that impactful for businesses with the talent and resources to adapt. But sudden change can cause disruptions. And one FTSE 100 firm that could be exposed to such a threat is Tesco (LSE:TSCO).
The country’s leading grocery retailer has been on a bit of a roll lately, with double-digit growth emerging among some of its product lines. As such, management’s grasp on the UK market has increased once again despite facing higher competitive pressures from discount retailers like Aldi and Lidl.
However, Labour’s plans to raise the living wage could put further pressure on the group’s already tight profit margins as its employee salary costs jump. After all, it does employ more than 300,000 people.
The bottom line
There are too many unknown factors to accurately predict when the stock market will make a complete recovery. But even with the potential disruption of a political shift, this is ultimately a short-term problem. In the meantime, plenty of top-notch UK stocks are trading at a significant discount. Therefore, regardless of what happens throughout the rest of 2024, I’m still snapping up long-term bargains for my portfolio.
