Market Insights

The New Year begins with increased confidence that inflation and interest rates have peaked. What will that mean for the market? Here are some potential outcomes based on recent trends.

New Growth Stocks May Go Mainstream

The period after 2017 saw a flurry of initial public offerings (IPOs) in growth stocks like Uber Technologies (UBER) and Airbnb (ABNB). (A few were known as “decacorns” because their market capitalizations exceeded $10 billion.)

Some of these newer companies were added to major indexes in 2023. UBER and ABNB joined the S&P 500. MongoDB (MDB), CrowdStrike (CRWD) and DoorDash (DASH) entered the Nasdaq-100.

Investors may look for this trend to continue in 2024. (Being members of indexes can be a key step toward mainstream acceptance.) The table below lists some other noteworthy companies that went public in recent years.

Pre-2008 Normal May Return

Everyone remembers how the coronavirus pandemic turned the world upside down in 2020. Fewer investors probably realize that preceding years were unusual in their own right as economies recovered from the Global Financial Crisis. That period saw weaker economic growth and super-low interest rates. Conditions started to change shortly before the pandemic as the labor market tightened. The trend has continued since, especially as manufacturing recovers.

The result? This year, things may start to look more like the pre-2008 period. In specific terms, this could mean:

• A resurgence in housing, homebuilding and mortgage lending.
• A return to brick-and-mortar retail after years of store closures.

Value Stocks May Recover

The post-2008 period caused investors to focus heavily on “growth” stocks: software, e-commerce and technology. (This resulted from innovation in those industries, plus super-low interest rates.)

However recent trends suggest “value” stocks may regain some lost popularity. These companies are more exposed to traditional businesses like finance, manufacturing and materials. Value stocks often trade at lower multiples than growth stocks. They may also see more benefits from a strong economy.

Takeover activity could be another theme as bigger companies and private-equity firms hunt for value.

Inflation May Keep Slowing

Inflation’s surge in 2021 and 2022 surprised many Americans accustomed to decades of stable prices. Its decline in the second half of last year was welcome news for both Wall Street and Main Street. Will the trend continue in 2024?

Falling rents could be driver. Shelter accounts for more than one-third of the inflation basket, so even small decreases can have a big impact on overall prices. Data from Rent.com shows asking rents stopped rising around May 2023. That could trickle through to the government’s numbers the closer we get into the spring.

Energy prices (7 percent of the index) have also moderated. This results from surging U.S. oil production, plus a sluggish Chinese economy.

Automobiles (5 percent of the index) could also provide relief as used-car prices fall and companies like Tesla (TSLA) lower prices.

Disruptions from the coronavirus pandemic caused all these categories to surge. However, recent data suggests they’re returning to normal.

Volatility May Remain Low

Stock market volatility tends to increase at times of fear and uncertainty. Not surprisingly, Cboe’s Volatility Index (VIX) jumped in 2020 and remained above normal through late last year. However it returned pre-pandemic areas in late 2023.

There could be reasons to expect it will remain relatively low. One is that retail money market funds held a record $1.7 trillion of cash in early November, according to the Federal Reserve. That total, up 42 percent from the end of 2022, may give investors the ability to buy dips and prevent sharp selloffs.

An article from Bloomberg on December 18 suggests that buying may have already begun. The news service reported that a record $24 billion flowed into the SPDR S&P 500 ETF (SPY) over the previous week. Most of the buying occurred after the Federal Reserve increased its projected rate cuts next year.

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