In case you missed it, optimism is creeping back into the stock market. I figure we have two months of anxiety-creating economic data to watch before I can confidently tell you that stocks will surge in 2024. Right now, I’m cautiously positive but was lifted up a wrung on the ladder of stock market optimism by that better-than-expected inflation number last week.
Again, in case you missed it, the October monthly inflation reading showed for the year that the CPI was up 4.9%, but for the year to September it was 5.6%. That’s a nice big drop! Now the big watch is on to see if ensuing inflation readings confirm that inflation is on the slide down.
If that confirmation comes through, then we can assume the RBA won’t try another interest rate rise. That will not only give home loan sufferers a break, but it will also help the stock market.
This chart shows you when stock prices started to slide in April 2022, just before the RBA started raising rates. The S&P/ASX 200 was at 7523, fell about 18% and has crawled 9% higher on the hope that rate rises will soon be over. And our market has been helped by the fact that the US looks like it has beaten inflation, so we’ve benefitted from Wall Street’s big bounce higher on the good CPI news.
The US market is up 5.42% in a month on the back of better-than-expected inflation news that suggest rate rises are over.
By the way, the US central bank is still promising to keep watch. If the fall in inflation is too slow, they’ll raise again. However, when the Fed says, “our job is done”, Wall Street will take off again.
If we nail inflation, one day we should expect nice stock price gains. By January 31, we should have a good idea just how effective the RBA’s 13 rate rises, which has taken the cash rate of interest to 4.35%, have been.
History has shown that the stock market players like to get in early if they think better or worse times are coming. So, the AFR’s headline: “ASX to rally as traders write off chances of December rate rise” is a nice sign of what might happen if the next two months of economic data come in better than expected.
There are two big numbers and dates to watch: January 10 for the December CPI and then January 31 for the December quarter inflation read. If they’re bottlers, the RBA won’t raise on the first Tuesday in February and stocks could and should surge.
All this will be good for super returns. It will then start speculation around when the RBA would start to cut rates, which will be another plus for stocks, provided they’re not headlines saying we could end up in recession.
Last week, the Paris-based think tank, the OECD, predicted that the RBA is done with rate rises. But what about cuts?
“The OECD expects the cash rate to remain on hold at 4.35 per cent until the third quarter of 2024, at which point the RBA is projected to start a very gradual easing cycle, taking the cash rate to 3.6 per cent by December 2025,” the AFR’s Michael Read reported.
And what about the chances of a recession? Here again the OECD delivers good news, expecting GDP growth to slow to 1.4% in 2024 from 1.9% in 2023, which is way off a recession.
If these guys are on the money, 2024 should be a nice year for stock players and those Aussies who live off their super.
What are the big data drops this week? Locally, we have the RBA rates meeting on Tuesday, economic growth on Wednesday and car sales numbers on Thursday.
Overseas, we’ll be keen to see the latest economic data from China and the US gets the latest jobs report, which could reinforce the view that inflation is falling nicely. Of course, if the news is too positive for jobs and wages, it could lead to fears that Wall Street has got ahead of itself and that would take stocks down there and here.
Of course, if the news is really negative, it could generate recession fears and that would hurt stocks, but then the Fed would start looking at rate cuts, and the market would love that.
On balance, the case for being positive on stocks for 2024 looks pretty sensible. It would be decidedly helped if China can grow faster than expected. That would be cream on my share market cake