I can tell you assuredly that the sky isn’t falling. Nor is the entire world on fire. This might come as a surprise, as headlines everywhere will do their best to convince you otherwise.
From my perspective, I do see some potential positives for next year that are not being widely discussed by major media outlets. Are these predictions? Certainly not. But I also would not be surprised to see these developments in the equities markets for 2024! I’m generally bullish on the long-term picture of most things, so I thought it prudent to share that perspective as it might relate to your portfolio.
Here are three positive developments that you just might see in 2024:
The rise of small-caps
This is more talked about than the other potentials I’ll mention, though it’s worth highlighting nonetheless. While the markets have fared very well in 2023 (despite some analysts calling for broad market declines in 2023 at this time last year) - with the S&P 500 up nearly 20% YTD at the time of this writing - the participation inside the market has not being equally distributed. Mega- and large-cap companies ($10B+ market value) led the upward charge when applying size factors. In looking at the style factor, growth pummeled value stocks, and classifying performance via sectors, technology and communications sectors have each gained over 40% (YTD).
With consensus being that the Fed is done raising rates, we are now starting to hear the discussion pivot to when the Fed will announce its first rate cut, with the markets are now pricing in a 60% chance of the Fed announcing those first cuts at their March meeting - up from 25% just a month ago. Rate cuts would be a tailwind for small-caps, as the costs and risk associated with borrowing and also raising cash (via secondary offerings) will decrease. Small-caps (< $2B market value) were the most affected by the dramatically fast increase of overnight lending rates from 0% to 5.5% in less than two years. Rate cuts would be a large factor in breathing new life back into the small-cap space. Look for small-caps to gain traction in 2024 in proximity to when the discussion of rate cuts reaches its boiling point late in 2024 Q1. Perhaps maybe as just a reversion to the mean, though perhaps, rather, a displaying of the pricing in of small-caps in a future rate-friendly world.
AI continuing its drive of technology and growth
It’s been about 13 months since the launch of ChatGPT, which many consider to be the first true en masse exposure of the public to a variety of real AI use cases. Right now, one can use AI to generate a business idea, create a company name, create a company logo, and develop an executable marketing strategy. While many have been concerned about the rise of AI potentially killing off many human jobs, there’s been an incredible exponential growth of how public and private companies can (and have) put AI to work.
While it’s difficult to say what percent of revenue growth companies have seen as a result of folding AI into their operations in a variety of means, discussion around AI among public company executives has indisputably skyrocketed. Q2 2022 saw less than 60 S&P 500 companies discuss “AI” on their earnings calls, while Q2 2023 saw that number more than triple to 180. And while correlation does not equal causation, it begs the ultimate question, “do we see the performance of 2023 that we have if AI and machine learning does not get thrust into the forefront, like ChatGPT did for the public?”
I’ll leave that hypothetical hanging, though I’m leaning towards AI as that “next” technology catalyst that allows for exponential growth, much like the internet and the cloud have done over the last 20+ years.
Rekindling of US-China relations catalyzes the semiconductor industry
China and US relations have been tumultuous for some time, ebbing and flowing through the international relations history books from friendly to not-so-much. We saw a decline in those relations in 2023, including China establishing export restrictions on minerals critical to semiconductor production. This was in response to the US setting export restrictions on US-made semiconductors, severely hampering Chinese businesses’ access to advanced semis. This typical tit-for-tat game played at the highest levels of international relations has led to China dropping from the number one US trade partner to number three, accounting for 11.1% of total US trade - now outranked by Mexico (15.7%) and Canada (15.3%).
Given that the US remains the number one trading partner for China as an individual country, and China is the largest market for semiconductors globally (accounting for 36% of sales for US companies), it would be surprising to not see any effort undertaken by the White House in an election year to try to bolster any success at next November’s polls. While it’s unlikely that any sort of dramatic shift in intercountry relations transpires, we also know the great lengths political parties will go in election years to win favor electorally. Any sort of reopening of import/export relating to the semiconductor industry between the two nations will certainly bring with it a spark that will only push the already-burgeoning industry higher.
None of these are predictions - which I think is important to emphasize - but rather thought pieces that the media would be precarious to lend any credence to, because, well…, negativity sells more clicks than anything. I would put the possibility for any of these potentials above 0%, however, though there are certainly more than enough variables at play every day that can steer the trajectory of these storylines. What I can say for certain, though, is that there’s a good chance that 2024 brings with it something that nobody sees coming - which happens every year. What’s coming next year?