The best stock index to invest in 2024

A new rally for the S&P 500 index in 2024? A huge reserve of cash parked in money funds today could fuel further gains in US stocks in the coming months as the Fed changes course

Good news for those hoping the US stock market can rise further in 2024.
After the rally in recent weeks, US equity investors wondering whether markets can continue their rise are looking at another major factor that could drive the value of their risky assets higher in the coming months: we’re talking about the mountain of liquidity of nearly $6 trillion that has been parked on money market instruments over the past 18 months.

The surge in money market yields over the last 18 months, coupled with the Fed’s ferocious policy of raising rates to the current 5.50% rate on Fed funds, has pushed liquidity to pour into the money markets and other short-term instruments, as many investors have chosen to pool cash in these ultra-safe vehicles, awaiting the outcome of the Federal Reserve’s battle against inflation.

According to data from the Investment Company Institute (the trade association of regulated mutual funds in the USA), up to 6 December 2023, the total assets of money market funds reached a record figure of $5.9 trillion.

The unexpected dovish turn of the Fed last Wednesday could shortly overturn this strategy of prudent parking of the liquidity of American pension funds and hedge funds: if the costs of mortgages, loans to businesses, and loans to households will fall in 2024, money market yields will most likely fall along with them.

This could push the aforementioned institutional investors to inject a significant amount of liquidity into stocks and other risky investments in the coming months, while other investors (insurance and management companies dedicated to private pension products) will rush to lock in returns in fixed income, investing in longer-term bonds.

It is interesting to see how the main financial assets have historically performed - over a 30-year observation period - by observing their average performance in the 12 months immediately following the peak of the Fed’s monetary policy rates.

Liquidity returned an average of 4.5% in the year following the Fed’s last rate hike in a tightening cycle, while US stocks rose on average 20% and the value of investment debt grade of 13%, according to BlackRock data, dating back to the period 1995 - 2023.

This makes 2024 interesting, in light of the past experiences of the US financial market, looking at the performances that occurred in the period immediately following the end of the Fed rate hike cycle.

Essentially, big institutional investors and sovereign funds from various countries have a considerable amount of liquidity. They are beginning to understand that they need to take action and make investments, as the attractive yields offered by a 6-month Treasury today may not be available in the future.

The end of the year is therefore likely to be the start of a new stock market cycle that will begin to self-reinforce as more and more investors sell Treasuries and money market funds to purchase equity and High Yield credit.
In my opinion, recent market movements show that the rush of American mutual funds and asset managers toward new strategies aimed at recalibrating their portfolios has already begun.

Benchmark 10-year Treasury yields, which move inversely to bond prices, fell about 110 basis points from mid-October (when the 10y Treasury hit a 5% yield) through Wednesday’s Fed meeting, i.e. up to 3.90%.

The S&P 500 index, however, rose by 2% since the Fed’s decision on Wednesday and stands just under 2% below the record level of 29 December 2021 of 4790. The index rose by almost 23% this year.

Of course, not all of the $6 trillion in money market funds may be available as gasoline to inject into the engines of stocks and bonds in 2024. Some of it is held by institutions that may still have that money in bank deposits, and that’s because they need to remain liquid for purposes related to their institutional activity.

We are therefore talking about a slow dismantling of cash, not a rapid one, spread over future months and not even a total dismantling of liquidity reserves by American institutional investors.

However, the re-calibration of managers’ portfolios is a phenomenon that will also spread to other global financial areas, such as the Eurozone and Southeast Asia, since it is inevitable that the other central banks will also follow the Fed in 2024 in the path of reduction of official rates.

But we are certainly not talking about "small change": to date the total assets of money market funds as a percentage of market capitalization stand at around 15.5%, in line with the long-term average of the last 60 years according to Goldman Sachs.

For now, however, the fact that investors’ appetite for risk is returning has been easy to spot.

For example, in the SP500 index options market, traders are no longer looking for protection, as they were in mid-October, i.e. they are no longer protecting themselves from a short-term decline in stock prices as before.

The price of these hedges (PUT options in this case) today has even become attractive from a historical point of view.

The Cboe Volatility Index, also known as the VIX index, which reflects the demand for insurance against market fluctuations through options on shares and indices, has today (15 December) fallen to the lows of the pre-pandemic period, i.e. lows at the end of 2019, settling at 12 (see Bloomberg graph below).

Cboe Volatility Index - December 2022 to December 2023

Source: Bloomberg

In conclusion, beyond the market reversals - which will perhaps occur in January and which will be physiological in an overbought context of the last two weeks - the forecast for the stock market for 2024 is starting to look definitely positive.

|DISCLAIMER
The information and considerations in this article should not be used as the sole or primary basis for making investment decisions. The reader maintains full freedom in his own investment choices and full responsibility in making them, since he alone knows his risk propensity and his time horizon. The information contained in the article is provided for informational purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public for savings.|

Original article published on Money.it Italy 2023-12-18 07:48:00. Original title: Perché puntare su questo indice azionario nel 2024