Over the past decades, Wall Street has witnessed the most aggressive rate hike cycle in history. However, with the Federal Reserve issuing its clearest signal to date that the "historic tightening cycle is about to end," it undoubtedly signals that the Fed no longer sees inflation as its top adversary. This implies that Wall Street is on the verge of a massive paradigm shift. Reflecting on the entirety of 2023, CPT Markets analysts state that "various assets have performed remarkably well":
- Bitcoin, for instance, soared by an astonishing 165%, firmly securing its position as the top-performing asset. Observing Bitcoin's past inertia, a pattern of a "four-year cycle" can be discerned. For instance, between 2011 and 2013, it surged for three consecutive years but plummeted in the fourth year. Subsequently, from 2015 to 2017, it witnessed a three-year uptrend and adjusted in 2018. And again, from 2019 to 2022, it went through another cycle. Thus, CPT Markets analysts caution that Bitcoin could have another two-year upward trajectory based on past trends.
- Stocks of Apple, Microsoft, Google, Amazon, Nvidia, Tesla, and Meta surged by 75% in 2023, leading many on Wall Street to hail 2023 as the "year of the seven giants." However, in contrast, the remaining 493 companies in the S&P 500 index achieved only a 12% growth, highlighting a significant disparity between these seven major players and the rest.
- Regarding the bond market's performance, 2023 exhibited a trend of squatting before jumping. Although in October there was a substantial issuance of government bonds causing bond prices to drop, with the amplification of rate cut expectations, including short-term treasuries, emerging market bonds, high-yield bonds, and even long-term bonds, all returned to positive returns.
- Gold prices frequently hit new highs, primarily driven by a weakened US dollar and the gradual heating up of rate cut expectations. Simply put, when gold prices rise amid a weak US dollar, a new wave of upward momentum is anticipated.
So, when rates peak, how should investors adjust their strategies to achieve dual returns in 2024? Before continuing the discussion, CPT Markets analysts state that "rate cuts do not signify economic weakness; they are just part of policy normalization." In simpler terms, rate cuts do not necessarily indicate severe economic issues or a fragile state but rather might be the government's adjustment to achieve policy balance and stability.
- Compared to large enterprises, small companies with their relatively limited capital strength, are more sensitive to macroeconomic and inflationary factors. To understand, for operational growth, they require external financing to support expansion and development. However, with both rates and inflation slowing down, the prospects for small-cap stocks become more optimistic.
- As the discount rate used for valuations is influenced by the current rate level, a future rate reduction could increase the valuation of growth companies, provided that other relevant conditions remain stable.
- When interest rates decline, fixed income, though less than stocks, generally performs well. If investors lean towards fixed income investments, considering medium-term to maturity bonds would allow more flexibility to adapt to rate changes and maximize market fluctuations.
With the end of the rate hike cycle, there's a high probability of bond prices rising. Witnessing both stock and bond markets substantially surging concurrently in 2024 is challenging because a significant increase in bond prices usually accompanies extensive rate cuts. Furthermore, based on the recent robust gains in tech stocks, the market need not overly worry about an excessively weak economy. Hence, the likelihood of higher stock market returns compared to the bond market next year is substantial.
