We’re well past the halfway mark of 2024, and global equities are delivering solid returns, just as we anticipated in our January Insights post—Navigating 2024.
As of August 16, 2024, the MSCI ACWI Index has posted a total gain of more than 13%, driven primarily by Technology and Technology-related Communication Services stocks. This performance aligns with the usual pattern for historically strong election years. However, the media often paints a different picture, suggesting that markets have surged too far too quickly—a misguided notion.
Bull markets frequently show extreme returns and historical patterns indicate that equity markets usually perform well in the second half of a calendar year after a solid first half. In fact, 15 of the last 16 US presidential election years with positive first halves saw gains in the latter half, and 7 of 8 such years with first-half returns exceeding 10% continued to thrive. It’s improbable that this year will deviate from this trend. Or as Sir John Templeton wisely said, “The four most dangerous words in investing are, ‘This time it’s different.'”
Eventually, we will have a clear election outcome, which generally boosts market sentiment, regardless of the candidates’ identities or policies. However, investors often let their emotions and biases cloud their judgment. The reality is that equities remain indifferent to politics, focusing instead on the potential for significant legislative changes. While there may be increased risk in 2025, depending on the new government’s structure, we should expect a strong market finish in 2024, with economic indicators remaining broadly positive.
Inflation is easing—more rapidly in Europe than in the US—while rising wages enhance purchasing power and drive consumer spending. After two years of cautious budgeting during a recession that never materialized, companies are beginning to adopt a more aggressive growth strategy. Many global businesses appear poised to increase their investment with strong balance sheets, renewed earnings growth, large profit margins, and low default rates. Consistent household spending and rebounding investment contribute to solid GDP growth, countering concerns over interest rates.
While the US has led this recovery, growth is also accelerating in Europe, Canada, and Australia. Japan is an exception, but the global economic upturn should benefit its multinational corporations. This year, the US economic strength has boosted sentiment, shifting investor attitudes from early skepticism to a more optimistic outlook. Despite this, we are still far from experiencing peak euphoria, which often shows its ugly face before a bear market starts. Interestingly, “two weeks ago, we saw the highest percentage of bulls in the Investors Intelligence Index since 2020: 64.2%. That was an extreme reading, above 97% of historical data points. But last week, the percentage of bulls moved down to 46.9%, which is right around the historical average. The 17% 2-week drop in the percentage of Bulls was the most significant sentiment swing we’ve seen since the October 1987 crash.“
So, with headlines continuing to express concern, suggesting that the US economic strength may be fleeting without Fed intervention, these same rate fears have been recycled ad nauseam for the last two years. But reality proves better than expected, so stocks keep moving higher.
Additionally, professional investors are adjusting their forecasts in response to the rising market. Still, these adjustments often need to catch up to the actual performance, reflecting only modest expectations in the future. The meager adjustments, coupled with a scarcity of IPOs coming to market and a generally cautious financial news environment, provide significant potential for further improvement in market sentiment.
2024 is on solid ground, with a resilient bull market doing fine. While growth has led thus far in this market cycle, remain watchful for a potential lasting shift to more cyclical categories, which often lead in a better-than-expected economic environment. Sentiment improvement amid better economic conditions provides ample room for upside surprises, and politics can be a tailwind to markets in 2024 as uncertainty starts to fade, which will reduce investor anxiety and help further stock market gains.
