After global stocks’ big 2023, and with their hovering above December 2021’s record high, we think investor sentiment is at an interesting place.^[i] Based on our read of the latest financial commentary, people aren’t outright pessimistic, but they don’t appear to have a high opinion of stocks’ prospects for this year. Instead, we have seen a lot of talk about what supposedly needs to happen for stocks to have even an ok year after last year’s sharp recovery, including rate cuts and rising corporate earnings.^[ii] This scepticism is just one reason we think the bull market (a long period of generally rising equity prices) will likely march on in 2024, delivering a good-to-great year for global stocks.

An age-old myth we have heard about markets is that they need catalysts—concrete reasons—to rise. In our experience, it can be hard for many investors to fathom that, left to their own devices, stocks’ natural tendency is to grow—but that is what we have found. In our view, it isn’t that stocks need reasons to rise, but rather, that if there are no reasons for them to suffer, we find they will probably do ok at least. Said differently, if you aren’t in a bear market (a prolonged, fundamentally driven broad equity market decline of -20% of worse), you are in a bull market. So absent a good reason to be bearish, being bullish is usually the right move, in our view.

Our research finds bull markets usually end one of two ways. One, they peter out once stocks have climbed the proverbial wall of worry and sentiment has spiralled into euphoria, causing people’s hopes and forecasts to run hotter than reality can keep up with. This is when we find investors tend to overlook apparent recession (a period of contracting economic output) warning signs, convinced stocks can run forever, setting up a bear market as stocks discount the coming disappointment. We don’t think we are there now, not with people thinking stocks are up only because the US Federal Reserve (Fed) might cut rates this year or only because they are anticipating an earnings recovery that might not come. Using Sir John Templeton’s sentiment framework—based on his observation that “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”—we appear to be in the sceptical phase right now, with plenty of wall of worry for global stock markets to climb.

The second bear market cause is what we call the wallop. That is, a huge, unseen negative shock capable of knocking the global economy into a recession, which would mean deleting a few trillion pounds of economic activity based on the global economy’s current size.^[iii] COVID lockdowns are almost too good an example, in our view, given most wallops wouldn’t even strike with that kind of speed. We always scan for such risks, but the only negatives we see right now are either too small, too widely known or (in our opinion) too misperceived to knock stocks back into bear market territory. The global economy has already proven it can grow through Fed rate hikes and inverted yield curves.^[iv] In our view, wars in Ukraine and Gaza, whilst tragic, are incidental to global commerce. Businesses are adapting to shipping disruptions in the Suez Canal, and freight rates remain well below 2021’s highs.^[v]

Which brings us to what we think is one of the best things about 2024: Because it is a US election year, American politicians are highly unlikely throw up new roadblocks to stocks’ rise. Election years tend to be bullish, based on our research. The US’s S&P 500 index’s average election year return in US dollars since 1925 is 11.4%, with returns up 83.3% of the time.^[vi] But less known, in our experience, is what we think is the reason why this happens: political gridlock, which usually gets a big boost from US midterm elections (hence year three also being up the vast majority of the time) and extends into year four as campaigning takes over.^[vii] Not only do we think legislators up for re-election not want to rock the boat by passing something big and contentious, but we find they also prefer saving contentious issues for fundraising and stumping. Hence, we usually get a year of big promises and rhetoric but relative inaction, punctuated by the US presidential election delivering a winner—which we find normally eases uncertainty regardless of party or personality.

So whilst we don’t think stocks need reasons to be bullish, we think the election year and its attendant gridlock is a pretty darned big one. For some, gridlock can be annoying since it can be perceived as politicians getting paid to bicker, but our research shows stocks love it. We find even well-intended and supposedly pro-business legislation can create winners and losers, stoking uncertainty and discouraging risk-taking. When US Congress is gridlocked, that uncertainty typically leaves, freeing businesses to plan and invest. Happily, this year gridlock is a global phenomenon, thanks to thinly stretched coalition governments throughout Europe, the UK’s pending-but-unscheduled election and a financial scandal threatening Japan’s government.^[viii] All are recipes for legislative inaction, in our view.

As for economic fundamentals, we think they look pretty good. Yes, there are weak pockets including Germany and the UK, but we have seen these discussed ad nauseam for over a year and a half now. The surprise power is sapped, in our view—helping explain why both markets hit new highs on a local currency basis recently.^[ix] Seems to us recession risk is known and priced, which we find makes mild downturns (should they continue) unlikely to present new threats. In our view, people who wanted to sell stocks on recession risk probably did so long ago.

Meanwhile, in the US, since inventories and government spending played a big role in GDP’s hot Q3, we wouldn’t expect the 4.9% annualised rate to continue.^[x] But the pure private sector components did a-ok, with consumer spending, business investment and even real estate contributing nicely.^[xi] All three regional Fed branches that publish “nowcasts”—estimates of yet-unpublished quarterly growth based on incoming data—point to growth in Q4 of between 1.8% and 2.5% annualised.^[xii] Those estimates are far from perfect, in our view, but they suggest America’s economy grew at rates similar to those seen in early 2023 as the year closed.^[xiii] In our view, this probably continues in 2024 as wage increases continue restoring households’ purchasing power, somewhat lower mortgage rates encourage home construction and businesses regain a growthy mindset after two years of cost-cuts and layoffs in anticipation of a recession that never arrived. These are all events we think are likely to happen, based on our research and analysis.

For the early parts of this year at least, we think growth-orientated companies (those that reinvest profits into their core business and typically trade at higher prices compared to corporate earnings and other similar measures) in Tech, Tech-like industries in Consumer Discretionary and Communication Services and other growth-heavy industries probably continue leading. Our research suggests the slow-growing global economy and inverted yield curve favour businesses whose revenues don’t depend on fast growth and who can use their size and pristine balance sheets to get funding in capital markets. But if the yield curve re-steepens later this year, we think it could tee up a shift to value-orientated companies (those that return more cash to shareholders and trade at relatively low prices compared to underlying business measures, like sales or earnings). In addition to triggering a global reacceleration—likely benefitting more cyclical companies—it could also improve bank lending (widening the gap between short and long rates makes lending more profitable), which would potentially pump more financing to smaller firms. Now, we don’t think this is assured, since the inverted curve didn’t hammer US lending as our research suggests it usually would.^[xiv] Banks’ deposit glut kept their funding costs low.^[xv] So rate cuts and a steeper curve might not turbocharge lending. But we think it is a possibility worth bearing in mind and watching for.

Overall, though, we think good things are likely in store in 2024. Stocks may be near record-highs, but we find it is very normal for markets to notch many new records during a bull market’s lifespan. In our view, volatility and a correction (sharp, sentiment-fuelled drop of -10% to -20%) are always possible, at any time and for any or no apparent reason, but they are normal and expected in bull markets—the tradeoff for stocks’ long-term returns. So we suggest taking a deep breath and enjoy what we see as another bull market year.