Markets eye uncertainty after blowout 2023 for US stocks

NEW YORK

As Wall Street closed the books on Dec. 30 on a surprisingly strong 2023, the focus is shifting to the U.S. presidential election and other risks confronting equities in 2024.

"This has been a great stock market year," said David Kotok, chief investment officer of Cumberland Advisors.

Propelled by so-called "Magnificent Seven" stocks, the Nasdaq led the major U.S. indices with a gain of 43 percent.

The Dow Jones Industrial Average tacked on 14 percent while the broad-based S&P 500 jumped 24 percent.

The surge has surprised leading market watchers who had bet on a recession in 2023 given the Federal Reserve's aggressive interest rate increases to counter inflation.

"We started the year fearful because there were concrete signs of recession," said Maris Ogg of Tower Bridge Advisors. "You end the year with complete euphoria."

Many of the gains accumulated since late October as market watchers cheered moderating inflation and a still-strong U.S. labor market as indicating the U.S. economy could avoid a recession.

The Federal Reserve's December forecast of three interest rate cuts in 2024 "poured more fuel in the market's fire," said Briefing.com analyst Patrick O'Hare.

The market has also cheered advances in artificial intelligence in the belief that the technology will further boost productivity and growth.

Bullishness over AI helped produce the outsized gains for the "Magnificent Seven" stocks: Amazon, Apple, Google parent Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla.

Among international markets, Tokyo's benchmark Nikkei index finished surged more than 28 percent in 2023, its best performance in a decade.

Frankfurt registered a yearly gain of 20.3 percent and Paris 16.5 percent, having recently hit record heights.

London, however, gained less than four percent in 2023, with analysts pointing to fears interest rates could stay high due to inflation.

For now, U.S. investors are broadly confident of the inflation outlook.

Stocks could have further upside if the job market stays strong, O'Hare said. However, stocks could suffer if the economic picture deteriorates or if the Fed backs away from interest rate cuts, he said.

But given higher labor costs 2024 could prove a "difficult" year for earnings, said Ogg.

Then there is politics.

"The uncertainty premium of political dysfunction in the U.S. is very high and not measurable," said Kotok, who noted the unpopularity of President Joe Biden and his likely challenger, former president Donald Trump.

"The country is faced with a Biden Trump rematch that it doesn't want," Kotok said.

Biden's approval rating was 39 percent at the end of 2023, according to Gallup.