3 macro factors to watch in the stock market for 2024

Investing in the stock market can be both exciting and daunting, especially in a world where economic conditions are constantly changing. To make informed investment decisions for 2024, it’s essential to consider macroeconomic factors that can significantly impact the stock market. In this article, we’ll discuss some key macro factors to watch out for as a retail investor navigating the stock market in 2024.

1. Inflation

U.S. inflation rates hit a peak of 9.1% in June 2023 as post-pandemic supply chain disruptions and pent-up demand drove global prices higher. In 2024, the U.S. Federal Reserve anticipates inflation rates to dip to 2.4%. Additionally, the central bank projected that the core personal consumption expenditures price index would diminish to 2.2% by 2025, eventually reaching its targeted 2% rate in 2026. These updated predictions indicate a more subdued inflation outlook for the next two years.

In Singapore, inflation is expected to cool to around 3% in 2024. Likewise, Malaysia inflation rates are anticipated to fall within 2.5% to 3.5% this year.

Lower inflation generally has positive effects on the stock market including:

• Increased purchasing power: Lower inflation means that the purchasing power of consumers’ money increases. When people can buy more with their money, it can lead to higher consumer spending, which can benefit companies and drive stock prices higher.
• Lower corporate costs: Lower inflation can reduce a company’s input costs, such as raw materials and labor. This can lead to higher profit margins, which can boost stock prices, especially for companies with a significant portion of their costs tied to inflation-sensitive inputs.
• Stable investment environment: Lower inflation generally implies a more stable economic environment. Investors often prefer stability, as it reduces uncertainty and risk. A stable economic environment can be conducive to stock market growth as investors may feel more confident about investing in equities.

While lower inflation can have several positive effects, if inflation drops too low and the economy experiences deflation (a sustained decrease in general price levels), it can lead to reduced consumer spending, delayed investments, and falling corporate profits, which can negatively impact stocks. China, for example, slipped into deflation in 2023.

2. Interest rates

With U.S. inflation risks receding in 2024, the Federal Reserve is expected to ease interest rates during the year. Based on minutes released during the Federal Reserve’s December meeting, nearly all Federal Reserve officials expect the benchmark policy rate to be lower by the end of 2024 compared to its current level. A majority of policymakers anticipate a reduction of at least three-quarters of a percentage point. However, the minutes did not specify when the cuts would happen, if indeed they do.

In general, lower interest rates boost investor sentiment through:

• Borrowing and corporate investment: Lower interest rates reduce the cost of borrowing for businesses. When borrowing is cheaper, companies may be more inclined to invest in expansion, research and development, and other growth initiatives. This increased corporate investment can boost corporate profits, potentially leading to higher stock prices.
• Consumer spending: Lower interest rates can also make it more affordable for consumers to borrow money for big-ticket purchases, such as homes and cars. Increased consumer spending can benefit companies and sectors that rely on consumer demand, further supporting stock market performance.
• Increased stock demand: Lower interest rates make alternative investments, such as bonds and savings accounts, less attractive because they offer lower yields. As a result, investors may shift their focus toward stocks, seeking higher potential returns. This increased demand for stocks can push their prices higher, leading to stock market gains.
• Dividend stocks attraction: Lower interest rates can make dividend-paying stocks more appealing to investors seeking income. As bond yields decline, dividend yields from stable, dividend-paying stocks may become relatively more attractive, leading to increased demand for these stocks.

3. Geopolitical events

Ongoing armed conflicts

We’ve already seen how the Russian invasion of Ukraine prompted a spike in global energy and food prices, pushing inflation up around the world. Other ongoing conflicts like the Israel-Hamas war could likewise threaten the global economy if the war spillovers to the rest of the region. Energy prices would be an immediate concern since the Middle East is a major oil producer. The World Bank has forecasted that oil prices could soar to over US$150 per barrel if the war escalates and envelopes the region. (Brent crude trades at US$78 per barrel as of 8 January 2024.)

U.S.-China tensions

Geopolitical relations between the U.S. and China continue to be tense despite Chinese President Xi Jinping meeting U.S. President Joe Biden in November. Potential flashpoints continue to hang over both countries including:

• Taiwan: The issue of Taiwan is a sensitive and contentious one in U.S.-China relations. The U.S. acknowledges the One-China policy but also maintains its commitment to assist Taiwan in its self-defence. In his New Year’s Eve address, President Xi reiterated that Taiwan and China will ‘surely be reunified‘. On the other hand, Taiwan presidential frontrunner, Lai Ching-te, asserted that ‘Taiwan’s sovereignty belongs to its people’. Taiwan is also home to Taiwan Semiconductor Manufacturing Company (TSMC), the world’s leading semiconductor manufacturer. Tech firms like Apple, Amazon, Google, Qualcomm, NVIDIA, and AMD heavily rely on Taiwanese chipmakers like TSMC to produce up to 90% of their chips. Any significant escalation of tensions or military conflict in the Taiwan Strait would have far-reaching consequences for the region and beyond.
• Chip war: In October 2022, the U.S. imposed restrictions on the export of advanced computing chips and related equipment to China, which were further tightened a year later. (In response, China imposed export controls on germanium and gallium, two elements critical for making semiconductors.) The ongoing chip war has direct implications for chip companies with exposure to the large Chinese market. Nvidia, for instance, stated that the new restrictions will impact its upcoming Q4 2024 results.

Our sales to China and other affected destinations derived from products that are now subject to licensing requirements have consistently contributed approximately 20% to 25% of Data Center revenue over the past few quarters. We expect that our sales to these destinations will decline significantly in the fourth quarter.

Colette Kress, CFO, Nvidia

The fifth perspective

As a retail investor in the stock market, staying current about macroeconomic factors can help you make more informed investment decisions. Remember that the stock market is inherently unpredictable, and a diversified investment approach, tailored to your risk tolerance and long-term financial goals, is often the best strategy for navigating the ever-changing landscape of the stock market in 2024 and beyond.