Twelve months ago, Tom Lee bet that 2023 would be fine.
While many of his colleagues on Wall Street were alarmed by the impending economic collapse, Mr. Lee, a stock market strategist who spent more than a decade running JP Morgan’s equity research before setting up his own firm, predicted in December 2022 that it would collapse. inflation and economic resilience will offset the broad bearish mood.
Mr. is right. Lee. Despite political brinkmanship over the country’s debt limit, a banking crisis in March, fears over the cost of financing the government’s fiscal deficit, an ongoing war in Ukraine and a new conflict with Israel, the core of Mr. Lee came true in 2023. Inflation fell, unemployment remained low, and the S&P 500 rose 25 percent.
Most investors disagreed with Mr. Lee’s prognosis; by 2023, they’ve earned more than $70 billion from funds buying US stocks, according to data from EPFR Global. Only a quarter of fund managers whose performance is benchmarked against the S&P 500 have beaten the index’s returns this year, according to Morningstar Direct.
“2023 was a year that people were convinced we were going to have a recession and they looked at everything through that lens,” Mr. Lee, head of research for Fundstrat. “Then there are people like us who say we don’t know the future but there is little evidence that a recession is coming.”
Heading into 2024, prognosticators tracked by Bloomberg more broadly share Mr. Lee, including analysts at Citigroup and Goldman Sachs. Binky Chadha, an equity strategist at Deutsche Bank who bet against the consensus on Mr. Lee last year, also predicts that the bull rally will continue.
At the same time, analysts at Morgan Stanley, JP Morgan and others maintain that the absence of a severe downturn in 2023 does not mean that it has been completely avoided, as the full impact of higher interest rates is still at work. in the economy.
“There are a lot of things that have to go right to still come out the other side unscathed,” said Mike Wilson, chief equity strategist at Morgan Stanley. He revised his bearish bets in July, although he has since been unwavering in his assertion that the economy will worsen.
Central to both views is the path of inflation and whether the Federal Reserve can return the pace of inflation back to its 2 percent target before the economy sputtered.
The Fed began putting the brakes on the economy in March 2022 by raising interest rates. But the central bank has recently appeared confident that it is getting closer to its target. The Consumer Price Index rose 3.1 percent in the year to November, down from a peak of more than 9 percent through June 2022. Core CPI, which excludes volatile food and energy prices, remained at 4 that percent.
The sooner the Fed reaches its target, the sooner it can release the brakes on the economy. The central bank recently forecast lower interest rates next year. Even without rate cuts, falling inflation and previously high wage growth could encourage consumers to keep spending, offering a tailwind for corporate earnings to rise higher. , Mr. Lee said.
Others are less confident. While the labor market remains strong, recent months have shown early signs of weakness, with unemployment rising modestly as more people start looking for work. Credit card delinquencies and the number of people who are overdue on car loan payments are also rising, as investors note that consumer finances have become more stretched after the repeal of debt forgiveness plans. student loan. With inflation still rising above the Fed’s target, these cracks could widen in the coming year.
Jason Hunter, an equity strategist at JP Morgan, said the market appears to be ignoring the expected slowdown in growth next year. “The equity market looks like it’s priced in for a very rosy outcome,” he said.
While the service side of the economy, such as restaurants, has held up well this year, manufacturing has struggled after a stretch of overproduction in 2022.
Energy stocks remain negative for the year, after being a standout performer in 2022. Utility stocks — usually a safe haven when the rest of the market is in trouble, thanks to their steady stream of income — fell by more than 10 percent since January. Smaller companies, too, weakened, with the Russell 2000 index still about 15 percent off its previous peak and 18 percent higher for the year.
For Mr. Lee and the growing herd of market bulls, these unloved areas of the market offer an opportunity in 2024. The turning point in the manufacturing slump, as companies work through the backlog of inventories and began placing new orders, could help companies struggling in 2023 catch up.
Deutsche Bank’s Mr. Chadha said economists continue to underestimate the value of growth in the economy this year. He thinks it’s likely to happen again.
“We think we will get positive growth surprises that will drive equities higher,” he said.
The more bearish ones say that a recovery in manufacturing is far from certain and that the slide in market sectors in 2023 could be a warning that if it weren’t for some behemoth technology stocks that lifted the S&P 500, the look stock rallies are very different.
These tech stocks have become so dominant, they’ve even earned themselves the nickname the Magnificent Seven. This is a group that boasts some of the biggest companies in the market: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. Without them, the S&P 500 is up about 10 percent this year.
“If the average company doesn’t see an improvement, that to me is the risk of a hard landing,” said Mr. Wilson of Morgan Stanley. “If we’re going to have a recession, it’s when these businesses decide to start letting people know.”
For Mr. Lee, history suggests a different outcome. When the S&P 500 rises at least 15 percent for the year, which has happened 28 times dating back to 1950, the index rises another 10 percent the following year half the time, and positive 70 percent of the time, he said. And when interest rates used to be between 3 and 5 percent, the stock market’s valuation was about what it is today, suggesting that the rally was not overdone.
“People try to be too theoretical about the stock market,” said Mr. Lee. “Accepting chaos is a better way to approach the market.”
