The S&P 500 experienced a great run throughout 2023 gaining more than 24%. The index has finished the year on a positive note and is just 25 points away from its 3 ^rd of January 2022 all-time high of 4,818. The Dow Jones Industrial Average and the Nasdaq 100 have gained 13% and 44% respectively in 2023 and have both posted fresh record highs.

After a brutal sell off in 2022, U.S. equity markets had a remarkable recovery in 2023 despite a widely expected recession, which never came. The U.S. economy managed to fare well amid rising interest rates and persistently high inflation thanks to the resilience of U.S. consumers. The $5 trillion fiscal stimulus injected into the economy during the Covid pandemic has led to excess savings putting consumers in a much stronger position than expected.

Source: TradingView

Many economists were expecting the interest rates increases which started in March 2022 to hit the consumer and businesses faster than they actually did and push the U.S. economy into a recession. However, both consumers and the corporate sector were more robust than they have been in previous hiking cycles and fared well in 2023.

It was widely expected that the higher interest rates would affect business activity and would lead to an increase in the unemployment rate. Instead, leisure and hospitality – the hardest hit sectors during the Covid pandemic were still recovering in 2023, which kept the labour market resilient. Strong wage growth and a rising labour force participation have been supporting consumer spending last year. Unless the labour market weakens and the consumer steps back a recession in the U.S. economy is unlikely.

As we enter 2024 economists appear divided in regard to whether a mild recession is coming in the year ahead or not. Investors are certainly worried about the lagging effects from the Fed’s tightening campaign, which could prompt companies to lay off workers and push the unemployment rate higher. Signs of a gradual economic slowdown and possible consumer spending weakening due to depleting excess pandemic cash balances, could trigger a deep pull back in the equity market.

Investors’ expectations of rate cuts by the Federal Reserve in 2024 propelled equity markets higher in 2023. Interest rates futures imply an 85% chance of a rate cut as early as March, with the market now expecting about 155 basis points of easing in 2024. However, the U.S. central bank is likely to maintain the federal funds rate within the current 5.25 – 5.50% range until an economic slowdown exerts further downward pressure on inflation, avoiding premature rate cuts that could delay inflation moderating to its target of 2%.

Despite the current macro backdrop, a pivot in both the economic cycle and the Federal Reserve policy is likely around the beginning of the second quarter. Disinflation is likely to continue to build momentum combined with a moderate economic slowdown, setting the stage for rate cuts at the end of the first half of 2024.

The expected economic slowdown and the impending U.S. presidential election are likely to intensify market volatility. Therefore, we anticipate choppy price action throughout the year. Nonetheless, we are of the view that pull backs present a buying opportunity and expect a continuation of the current bull trend to new record highs in the range of 5,200 and 5,250. Until signs of new economic cycle emerges, we remain cautious, focusing on quality stocks and fixed income.