These are the 4 big risks for the stock market in the first half of 2024
Thomson Reuters
- Ed Yardeni's outlook for a Roaring 2020's is still alive, but there are nonetheless many risks to be aware of.
- Geopolitical tensions, a hawkish Federal Reserve, and gridlock in Congress are risks stock market investors should consider.
- These are the 4 big risks to the stock market in the first half of 2024, according to Yardeni.
As bullish as market veteran Ed Yardeni is on the stock market, he does admit that risks are still abound and need to be closely monitored by investors.
Yardeni has argued that the Roaring 20's have arrived for the economy and stock market, as technological innovations like artificial intelligence could drive productivity growth while keeping inflation at bay.
But a lot can still go wrong, as they have in the past four years. In 2020 a global pandemic arrived in the form of COVID-19, in 2021 there were two more waves of COVID, in 2022 Russia invaded Ukraine and inflation soared, and in 2023 a new war broke out in the Middle East and fears of an imminent recession were widespread.
"Yet during those four dangerous years, the S&P 500 advanced 47.6% from the end of 2019 through the end of 2023," Yardeni said, adding that the risk-on rally in stocks towards the end of 2023 has made some investors "carefree."
But they shouldn't be carefree, according to Yardeni, as there are still a number of risks present to the economy and stock market.
"Our mantra during carefree times like now is: 'We have nothing to fear but nothing to fear,'" Yardeni said.
These are the four "clear and present dangers" that investors should monitor in the first half of 2024, according to Yardeni.
1. A hawkish Federal Reserve
Investors expect a dovish Fed in 2024, with current market odds suggesting that the central bank will cut interest rates at least six times in 2024. That's a significant disconnect from the Fed's own expectations of just three interest rate cuts in 2024.
According to Yardeni, it's likely that the Fed will implement offer hawkish comments to lower those dovish expectations among investors.
"They will continue to be data dependent. As long as the unemployment rate remains below 4.0%, they are likely to hold off on easing, in our opinion. That's because their worst nightmare would be a rebound in inflation," Yardeni said.
2. Gridlock in Congress
Political fighting among Democrats and Republicans is nothing new for investors, but it certainly doesn't help amid a ballooning federal deficit, government funding showdowns, and rising geopolitical tensions.
Yardeni highlighted that the two political sides need to agree on 2024 spending targets in the next few weeks, and already the two sides are in disagreement about how to tackle immigration reform and military aid to Ukraine and Israel.
"There is also paralyzing partisanship within each of the two parties," Yardeni noted, adding to the political infighting.
3. The Middle East war
The outbreak of war between Israel and Gaza runs the real risk of turning into a broader regional war. This has been slowly materializing in the form of Yemen's Houthi militants attacking ocean tankers in the Red Sea.
American forces sunk three Houthi boats, killing their crew members, and Iran has responded by sending a warship into the Red Sea. This conflict could ultimately lead to higher oil prices, which is something investors should watch out for, according to Yardeni.
4. China and Taiwan
China's economy has been struggling over the past few years, and that could be great news in terms of limiting the country's ambition to reunite with Taiwan. But it's still a real risk that a conflict between China and Taiwan breaks out based on recent comments from Chinese President Xi Jinping.
"A weak economy should cause China's government to hold off on any planned invasion of Taiwan. Nevertheless, Chinese President Xi Jinping on Sunday pledged Beijing's 'reunification' with Taiwan in his year-end address, just weeks before the self-governing island holds elections for its president and legislature," Yardeni explained.
Any conflict between China and Taiwan would send global supply chains in a tailspin, especially for semiconductors and their end products.
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