Review 2023 and outlook 2024

Chart of the week

The chart shows the forecast of each of the voting representatives of the US Federal Reserve, which decides on the level of the key interest rate. Each dot represents the vote of one of the members.
Following the strong rise on the stock markets, prices are likely to lose some of their momentum.

The chart shows the level of inflows into the SPY ETF on the S&P 500. On December 19, we saw the largest inflow into the ETF since it was measured in 1990. With the level of inflows, it can't continue.

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Why this is important
Last week, the US Federal Reserve caused price fireworks. The upward price reaction was the third strongest after a Fed meeting since 1980.
The majority of members of the committee see the key interest rate at 4.5 % in 2024. As the central bank usually changes interest rates by 0.25 %, this corresponds to three rate cuts in the coming year.
As a reminder, at the last central bank meeting, the head of the central bank Jerome Powell did not want to agree to a statement on interest rate cuts and now just three are within the realm of possibility next year.
This turnaround is remarkable. Interest rates in the USA then immediately fell sharply.

The European central bank was much more cautious and did not want to confirm the same statements as its American colleagues. In the USA, the trend reversal in interest rates now appears to be clear, while in Europe they could rise even further. This suggests that the interest rate differential between the US and Europe is trending downwards, leading to a stronger EUR.

Review 2023
The chart is representative of many other markets.

The chart shows the performance of the Euro Stoxx, one of the most important indices for European shares.

2023 can be divided into three phases. From the beginning of the year to mid-2023, there was one of the strongest rises at the start of a year in over 50 years. The banking crisis in the USA put an end to this and there was a sideways trend from February to November. A brilliant Christmas rally then began at the start of November. Anyone who missed the first upward movement in 2023 lagged behind returns for the entire year.
The market had to come to terms with last year's extremely sharp rise in interest rates. In spring, this led to the banking crisis and in recent months the bankruptcy of various real estate providers has been making the rounds.
The main question on the minds of many investors was whether or not there would be a recession. Many had already expected a recession in spring 2023, but in the end it did not (yet?) happen.

The graph shows the economic development of durable goods (blue line) (machines, cars, etc.) and the service sector (green line). The black line shows the total figure.
The conclusion from this graph is:

We already have a recession in durable goods, but not in services.

Most economic indicators such as the LEI (Leading Indicators) are very industry-heavy and show a recession, but inflation is falling too little and unemployment is not rising either.

Outlook for 2024
The main question that will occupy us in 2024 is still whether the recession is still coming or not.

Possible interest rate cuts are currently driving euphoria on the market, but ultimately the US Federal Reserve will only cut interest rates if the economy is doing badly and stimulus is needed to revive the economy. However, a poorly performing economy would be bad for many equities.
Since the US Federal Reserve was founded, there have been 15 cycles of interest rate hikes to slow down the economy and combat inflation. In 14 of the 15 cases, it slowed down too much and a recession ensued. Only once, in 1993, was a soft landing achieved.

The current situation on the markets is regularly compared with the period from 1972 to 1985. After a long period of very low interest rates, these rose very sharply. The parallels in the development of inflation with this period are indeed astounding.
If we follow this plan, we would see inflation continue to fall until the fall. But then we would have to be prepared for a trend reversal.
Although we have had a strong market rally, many institutional investors are still holding historically high money market investments. Long-term considerations also suggest that the upward trend will continue.

The chart shows the average return of the S&P 500 since 1984 in all cases where there was a recession (gray line) or no recession (blue line) after the first interest rate cut.

The majority of market participants expect the first rate cut in March 2024, i.e. we are 3-4 months before the first rate cut (red arrow). In all cases since 1984, the stock market has risen in the 3 months before the first rate cut (green arrow).
We expect a positive start to the new year. This will encourage even more investors to get back into equities.
But as the saying goes: "The cow is not off the ice yet". There are still many signs pointing to a possible recession.
We still believe in the long-term financial market cycle and in a recession.

Based on this long-term financial market model, we believe that we are still in phase 4. This means that investments in quality stocks and large companies (large and mega caps) are still the favored investment.

In the bond sector, government bonds in particular are benefiting from falling interest rates. In the event of a recession and higher bankruptcy rates, the risk premiums for corporate bonds increase and reduce their yield.
With this report, we sign off for this year. We wish all our loyal readers happy holidays and a happy new year.