Stocks just had an awesome November. But 2024 could see an even bigger rally, driven by declining inflation and the return of retail.
The Year-End Melt-Up
The end of the year often sees a stock rally. This fall has been no exception.
The S&P 500 jumped 8.9% last month, the second best November since 1980. Throughout my time in Porto, I kept checking the market, thinking "I ought to go on vacation more often!"
Stocks were so beaten down that despite the rally, valuations remain reasonable. The S&P's PE ratio is in the low 20's, about average for the last few decades.
The End of Inflation?
Equities had a rotten 2022, driven by rapid rate increases from the Federal Reserve. The Fed was hitting the economy with a stick to try to tame inflation — and it worked.
The Fed's preferred measure of inflation, the personal consumption expenditures (PCE) index, increased just 0.1% in October. Annualized, that puts inflation at just over 1%, well below the Fed's 2% target.
Even year-over-year, the PCE is running at just 3%, not far from the Fed's target.
The Top of the Rate Cycle
Declining inflation means the Fed may no longer need to raise rates.
Rate increases take time to work their way through the economy. With month-over-month inflation already running below the Fed's target, why would they risk slowing the economy even more and risk causing a recession?
Indeed, if the economy is already beginning to slow, the Fed may need to cut interest rates next year.
A peak in rates could cause a rally. And if we see lower rates, I expect stocks to really rip.
The Return of Retail
Although the S&P has jumped 19% so far this year, retail investors have actually been leaving the market. Investors pulled $137 billion from equity funds this year, on top of $54 billion in 2022.
Many mom and pop investors probably got spooked in 2022. Even with this year's strong performance, they may be too scared to reenter the market.
But sooner or later, greed trumps fear.
If we continue to see strong performance, retail is likely to return. And if interest rates decline, alternatives like high yield bank accounts become less attractive.
2021 saw $295 billion in retail money flood equity funds. If we see anything like that in 2024, it could push up stock prices significantly.
Wrap-Up
This year has seen a significant rally in stocks. But with a strong economy, declining inflation, and lots of retail money sitting on the sidelines, 2024 could be even better.
What do you think the new year holds for stocks? Leave a comment and let us know!
By the way, yesterday marked 3 years on the blog. Thanks for a great three years, everybody!
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