As 2024 begins, investors have many questions about the financial markets. One of the most important questions is whether market behavior will return to normal.
Stuart Kaiser, head of equity trading strategy at Citigroup, believes that a shift towards normalization in growth, policy, and cross-asset relationships will occur in 2024. Kaiser outlined five questions that could have significant impacts on the markets in the new year and expects to have answers to these questions early in 2024.
The first question is whether broader earnings growth will lead to broader leadership in the stock market. For the market rally to expand, companies need to back up last year's gains with earnings growth. Kaiser's team believes that for a broad-based rally to occur in 2024, earnings will need to grow more evenly across the 11 sectors of the S&P 500. However, earnings remain a risk for the market, as analysts expect them to boom after a lackluster year in 2023.
The next question revolves around the possibility of a U.S. recession. Has the U.S. economy overcome the risk of a recession or could it still be at risk due to the Federal Reserve's aggressive interest rate hikes? Citi's U.S. economy team predicts a recession starting in the second quarter. Regardless of whether a recession occurs or not, Kaiser and his team expect more focus on GDP and labor market data in 2024. This shift back to focusing on growth rather than inflation would be a return to normal.
The third question concerns the Federal Reserve's rate-cut calculus. While there has been speculation about interest-rate cuts in 2024, Kaiser believes that the reasoning behind the cuts will be just as important as the number and pace of the cuts. Insurance cuts would be positive for the equity markets, but if cuts are a response to recession conditions, the markets could experience a sharp sell-off.
The fourth question is whether the correlation between stocks and bonds will return to normal. In the past two years, stocks and bonds have moved in sync, but Kaiser expects the correlation to become negative again in 2024.
Lastly, investors may be worried about a rotation in January. Growth stocks that performed well in 2023 may struggle at the start of the new year, but this is a seasonal pattern. Citi's analysis of equity factor performance shows that momentum stocks typically don't perform well in January. Investors seeking enduring changes in market leadership may want to consider bullish call options on an ETF tied to the Russell 2000 or bet on the equal-weighted version of the S&P 500 to outperform its market-cap weighted counterpart.