Global equities are poised for a notable boost in the upcoming year, provided that central banks adopt an accommodative monetary policy and the Federal Reserve manages a soft landing, according to analysis by HSBC. In a note to clients, Alastair Pinder expressed optimism by stating, “We expect global equity markets to climb higher and forecast 15% upside by end-2024.” However, Pinder acknowledges that against a backdrop of slowing economic growth and declining interest rates, market breadth may progressively narrow, with a large portion of the market remaining stagnant, while the United States continues to maintain its dominance.
Historically, when the Federal Reserve has successfully engineered a soft landing, the S&P 500 has experienced an average rally of 22% between the pause in interest rate hikes and six months after the bank began its rate cuts. It is in light of this trend that Pinder favors the technology and consumer discretionary sectors. He believes that these areas present favorable risk profiles, particularly following the recent dip in equities.
Possibility of a Soft Landing Amid Inflation Concerns
Austan Goolsbee, the Chicago Federal Reserve President, suggests that the possibility of a soft landing still remains viable as the central bank seeks to combat inflation without inflicting significant harm to the economy. Goolsbee acknowledges the unique circumstances of the current moment and highlights the potential for what he calls the “golden path” – a scenario where inflation is brought under control without triggering a recession. He further notes that the decline in price pressures may reflect the fastest decrease in inflation witnessed in the last century.
U.S. crude oil prices have witnessed a nearly 4% decline, reaching their lowest level since July. The drop can be attributed to concerns of an Israel-Hamas war potentially escalating into a broader regional conflict, which have been overshadowed by weak economic data. West Texas Intermediate (WTI) experienced a decline of $3.09 or 3.82%, settling at $77.73 per barrel. Similarly, Brent fell $3.19 or 3.75% to $81.99 per barrel, marking their lowest prices since July. The market reaction follows a disappointing report on China’s greater-than-expected decline in exports during October, signaling a softening of global demand.
Rob Ginsberg, a strategist at Wolfe Research, cautions that the early November rally may soon lose momentum, based on trading patterns observed earlier in the year. Ginsberg points out that every rally since the peak in July has failed to reach a new one-month high, ultimately transitioning into a new low, indicative of a downtrend. This analysis raises concerns about the sustainability of market rallies in the current economic climate.
The future holds promise for global equities, with the potential for significant gains if central banks provide monetary stimulus and the Federal Reserve successfully navigates a soft landing. However, uncertainties surrounding economic growth, declining interest rates, and inflation persist. Investors should closely monitor these factors and consider sector-focused investments with favorable risk profiles. Additionally, recent declines in crude oil prices highlight the impact of weak economic data on market sentiment, while potential market stall-outs remind us of the need for careful evaluation in an evolving trading landscape.