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Stock Market Jumps Through 2024, Ignoring Recession Fears

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A year that many experts said could end in a recession and rising unemployment instead ended with a rising stock market and enthusiasm for the economy, as the combination of Big Tech and consumer confidence has propelled financial markets towards 2024.

The S&P 500, a market-tracking index that underpins the fortunes of millions of retired Americans, has gained nearly 25% in 2023, far more than analysts forecast at the start of the year. “No one was demanding 20 percent last January. … I mean no one,” said Michael Farr of the Washington-based investment firm Farr, Miller & Washington.

The Dow Jones Industrial Average surpassed its previous record and gained more than 13 percent.

But it’s the tech-heavy Nasdaq Composite Index, led by a group of elite tech companies nicknamed “the Mercenaries Seven,” that has truly wowed Wall Street, gaining more than 40% for the year. These same stocks had suffered the brunt of a historic sell-off the year before, when the Federal Reserve began raising interest rates, and they had started the year on a cautious footing as a recession seemed imminent. Instead, the economy remained stable, strengthening their investment prospects just in time for an explosion in investor attention around artificial intelligence.

Most of the stock market gains came in the final months of the year, when a slew of new data seemed to confirm once and for all that the The Fed’s goal of a “soft landing” — a shortcut to reducing inflation without breaking the economy — could be in sight.

The recession that wasn’t

Since March 2022, the central bank has gradually increased its benchmark interest rate to its highest level in 22 years, now between 5.25 and 5.5 percent. The theory is that higher rates cancel out inflation because they force consumers and businesses to cut spending.

Inflation eventually fell, but the rate-hike campaign also came at a cost. New mortgages have become less affordable, preventing many people from becoming homeowners. Businesses that depended on loans had to slow down their expansion.

A lingering fear among some investors was that the central bank would go too far in its rate hikes, slowing the economy too much in its zeal to drive down prices. Markets have seen sell-offs several times in 2022 as investors anticipate the Fed’s actions. One of the worst losses was the technology sector, whose riskier, growth-oriented business model makes it more vulnerable to shocks, even minor changes in interest rates. The Nasdaq index lost a third of its value.

At the start of 2023, analysts estimated there was a 65% chance the year would see a recession, according to a consensus estimate referenced by Goldman Sachs.

Instead, the latest economic data suggests that higher rates are having the desired impact against inflation without the worst side effects. Inflation fell faster than expected, standing at 3.1% in November. This is far from the peak of 9.1% reached in June 2022 and within sight of the Fed’s 2% target. (The Fed’s preferred measure of inflation was even lower, at 2.6% in November from a year earlier.)

Everyone expected a recession. The Fed and the White House have found a way out.

Meanwhile, the job market has moderated without collapsing. Overall job growth slowed from an average of 240,000 new jobs each month to 199,000 in November, while the unemployment rate that month stood at 3.7 percent. In fact, the unemployment rate has remained below 4% for two years, the level last reached in the 1960s. As of Thursday, about 212,000 Americans were filing new unemployment claims each week, a figure widely followed for layoffs which remain close to their historic lows.

Consumer spending also held up. New data from Mastercard released Tuesday showed Americans vacationed despite growing consumer debt and the continued bite of inflation, with online spending up 6.3 percent.

Robust Christmas shopping sends economy soaring through 2024

Even the global banking crisis, which shook markets in March and April after a bank run forced Silicon Valley Bank to close, failed to cause a broader collapse of the financial system.

Dan Ives, senior analyst at Wedbush, estimates that about 50% of the tech sector’s gains in 2023 come from the Fed’s success in taming inflation, which has raised expectations that the central bank will cut rates in 2024 .

The other half reflects investors’ search for AI-related opportunities, creating “a perfect storm for tech bulls,” Ives added.

The year began with massive layoffs.

Amazon has cut about 27,000 jobs, citing an “uncertain economy.” Google’s parent company, Alphabet, announced in mid-January that it would cut about 12,000 jobs, more than at any time in its history, with Chief Executive Sundar Pichai saying it had “hired for a economic reality different from that which we face today. » Microsoft cut 10,000 jobs following warnings from Chief Executive Satya Nadella that consumers were cutting back on spending and businesses were bracing for a recession.

(Amazon founder Jeff Bezos owns The Washington Post, and the paper’s interim CEO, Patty Stonesifer, sits on Amazon’s board.)

Those cuts were driven by the perception on Wall Street that the biggest tech companies were bloated, lucrative giants with dubious growth prospects, akin to the railroad or steel conglomerates of decades past, said investor and stock trader Tom Essaye , founder of Sevens Report Research.

Additionally, tech companies “built aggressively in 2021 and 2022, and the demand they thought they were building for didn’t materialize,” said Mark Mahaney, managing director of Evercore ISI.

However, as the year progressed, demand for these companies’ services, such as advertising and online retail, held up better than expected, Mahaney noted, while their balance sheets were strong after a season of discounting costs. A subsequent wave of profits brought investors back to the technology sector.

Against this backdrop, the AI ​​boom has made fortunes for a few big companies, leading to a literal renaming of leading tech players. These heavyweights are now known as the Magnificent Seven: Google, Meta, Apple, Amazon, Microsoft, Tesla and the latest newcomer, Nvidia.

Nvidia was one of AI’s biggest winners after revealing in May that one of its computer chips had driven ChatGPT, the AI ​​language model that wowed users with its problem-solving ability and imitate human speech. The company’s stock price soared higher following this news and is now up almost 240% from the start of the year.

Nvidia stock hits all-time high as AI boom continues

But it’s not the only tech company to thank ChatGPT and its creator, OpenAI, for massive gains in their stock price. Microsoft, which invested $10 billion in OpenAI in January, has seen its stock rise more than 50% this year, a 13% increase in the month alone since it first announced its investment in OpenAI.

Some analysts say the focus on AI has already transformed investors’ broader view of the technology sector, even for companies that don’t offer any AI-enabled products.

“Artificial intelligence represents a new frontier of potential growth for these companies,” Essaye said. “Whether your business benefits from AI or not, the market is responding favorably. There it is, and they’re piling in.

Every startup is now an AI company. Fears of bubbles are growing.

How soon these investments will bear fruit is another question. ChatGPT has wowed the world with its ability to mimic human speech and thought patterns, but the business case going forward is less clear, Essaye noted.

With technology, “the evidence has to start showing up,” Essaye said. “And because (the Magnificent Seven) make up a very large portion of the S&P 500, if they start to underperform, they will act as an anchor in the market no matter what.”

Eli Tan contributed to this report.

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