While the
S&P 500
began 2024 on a down note, the index has made incredible strides this decade—despite big obstacles. The question is whether that luck will hold.
In fact, the S&P 500 has risen nearly 50% from the start of 2020 through the end of last year, a fairly remarkable feat that seems to defy the headlines. Covid-19 upended the world in 2020, and kept causing havoc in 2021—the year everyone learned about supply chains. The Russian invasion of Ukraine and inflation were the big stories of 2022, while conflict again marred last year, be it the war in the Middle East or a recession-plagued China threatening Taiwan.
It’s perhaps little wonder then that many investors are feeling blasé about the potential threats to the market. Some if it is logical, given that previous big headwinds haven’t made much of a dent; some of it may simply be bad news fatigue: From doom-scrolling to depressingly predictable saber-rattling, many people are managing to see beyond current perils.
Nonetheless, while ignorance may be bliss, it can also be expensive.
“At this point, investors seem carefree, which worries us,” writes Ed Yardeni, president and chief investment strategist at Yardeni Research, who argues we’ve entered a “fifth year of living dangerously…We’re monitoring four clear and present dangers that investors seem to be shrugging off.”
The first is a more-hawkish-than-expected Federal Reserve. The market is already anticipating multiple interest-rate cuts from the central bank, but there’s no guarantee those will materialize, which would zap some of stocks’ bullish mojo.
For Yardeni’s part, he thinks that ongoing strong employment is the biggest obstacle to a more dovish Fed, “because their worst nightmare would be a rebound in inflation.” (He doesn’t believe the U.S. will fall into a recession this year, but it’s also worth noting that the market doesn’t necessarily embrace interest-rate cuts made in the face of deteriorating economic conditions.)
The second worry is also courtesy of Washington: namely partisan politics. While plenty of people are nervously eyeing the November presidential election, more immediately Congress needs to agree on spending targets in the coming weeks, and as last year’s increasingly familiar government shutdown near-miss showed, compromise is becoming increasingly difficult to secure. This comes at a time when some strategists are worried about waning demand for Treasuries, which pushes up yields.
The third threat is the tension in the Middle East, as the Israel-Hamas clash appears to be morphing into a more regional conflict: See last week’s attack on a container ship by Iran-backed Huthi rebels in Yemen. So far the situation hasn’t impacted oil prices, but as Barron’s has noted before, war is not necessarily good news for markets.
The fourth concern is China and Taiwan. To say that China’s reemergence from Covid didn’t go as planned is an understatement, and Yardeni writes that a “weak economy should cause China’s government to hold off on any planned invasion of Taiwan.”
That said, he writes that “Chinese President Xi Jinping on Sunday pledged Beijing’s ‘reunification’ with Taiwan in his year-end address, just weeks before the self-governing island holds elections for its president and legislature.”
Moreover, while experts disagree about China’s use of diversionary foreign policy, there are always concerns that some politicians may embrace war to distract from domestic problems.
It’s not all doom and gloom, though: Yardeni ultimately thinks that while these issues will bog down the S&P 500 in the first half of the year before rallying to 5,400—an increase of roughly 13.5% from today’s levels—a neat reversal of the pattern that held for much of 2023 (before November’s rally).
He’s not alone in either sense.
December’s big Santa rally might lead markets to take a bit of a pause to start the year, and if interest rates stay higher for longer, that will be another headwind for stocks, even as other skeptics point to metrics such as the gold/stock ratio as worrisome. Stifel’s Barry Bannister believes years of lackluster market returns could be ahead.
Others argue that the first half of the year will be volatile at the least as investor expectations meet with reality in terms of economic growth and interest rates.
Yet Yardeni also has company in the bull camp: Several other firms including Deutsche Bank and BMO Capital Markets see the S&P 500 comfortably surpassing 5,000 this year.
Ultimately rallies have defied the odds before—see last year—and there’s no guarantee any of these Four Horsemen will derail 2024. But optimism isn’t best done blind.
Write to Teresa Rivas at [email protected]
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