Steen's Chronicle: Given two options, take the third

Macro
Steen Jakobsen

Chief Investment Officer

I've been reading through the usual number of end-of-year/Outlook 2024 reports and it strikes me that there is a strong consensus in place. I'll let you figure out what it is, but... As someone who hates having no sense of direction, I decided to write out the two most likely scenarios: I will call them "Everyone is wrong" and "It's all about elections, stupid!." Of course, there are several other options, hence the title, but the two that I will outline now are the most likely in my opinion:  

Everyone is wrong


  • No soft landing (2024 will be the true cost of 2023 rate hikes).
  • No more improvement in inflation (1-year inflation swaps are already at 2% now).
  • No further rate cuts are priced in (155 basis points are priced in for the next 18 months).
  • Earnings have not yet bottomed out.
  • A Middle East crisis is a real risk.
  • Ukraine talks fail and the war enters a deadly phase, creating a massive identity crisis in the EU and the US.
  • The Fed continues to play the inflation card and steps back from political "help".
  • A funding crisis based on new record debt levels in the US (Q1 sees the largest issuance ever from the US Treasury + corporates).
  • The real cost of changing weather patterns means a massive food crisis.
  • A small bank crisis re-emerges.


What is cheap and what will happen to the market?

  • Stock market is down 50%.
  • Energy and commodities are dirt cheap (Gold to USD 3.000).
  • Soft commodities explode in price.
  • ECB and Fed end up cutting by more than 250 basis points.
  • Inflation swaps hit a new low (190 basis points) and rally to a new norm of 350-400 basis points.

It's all about the election, stupid!

  • The financial system is being "juiced" to give maximum support to incumbent political leaders.
  • The stock market is now really just a number. A game played live with big numbers. A modern-day Monopoly game. 5,000 why not 6,000 in S&P 500?
  • A soft landing does happen - magic prevails, soft financial conditions catapult a restart of the growth engine combined with fiscal overflow from 2023.
  • The Fed continues to indicate that if things get worse, they stand "on the ready." The Fed already seems engaged in changing direction with no economic vindication in November 2023. Why?
  • The Fed stops QT in a desperate move to support the market until November.
  • Elections are seen as business-friendly.
  • Peace in Ukraine.
  • The Middle East remains contained.
  • Oil and energy continue to fall on the "hope of new alternative energy sources" - the market buys the concept of green energy and forces the energy sector down.
  • Real rates hit a new recent low below 100 basis points. Inflation picks up a little and rates fall a lot.
  • The US election cycle is confirmed in the upside on stocks.
  • The US dollar goes into a tailspin and the Fed directs the market to YCC-like conditions with limited upside in rates possible.

What is cheap and what will happen to the market?


  • S&P 500 is up 20% and Nasdaq is up 35%.
  • EMG does even better than S&P 500 with a 35% gain.
  • Leveraged equity outperforms along with Russell 2000 and 3000 with 36% gains.
  • Credit spreads fall close to zero. There is less risk in corporates than in governments!
Of course, you can come up with better and more realistic scenarios, but as the simpleton I am, I will wait for one of the two scenarios above to play out in what is the most greedy, uninformed, least fundamental market in modern history.

We have politicians globally who are reality stars and live in their own fantasy and with their own economic laws: Putin, Erdogan, Trump, Meloni, Wilders, to name a few. No wonder with "reality stars" running the narrative, we will, and should, end up with an economic and political landscape governed by storytelling rather than hard facts.

Never has the market been more separated from facts than now, never has the incoming problems been ignored more; debt, spending, inflation, military, and energy deficiencies, and in 2024, we will add fundamental problems of food growth and security to the equation.

We all know that if we don't face problems, they will only grow and get worse. 2024 could be another year of pretending and postponing because major economies need "speed" and "grace" for elections. However, it could also be a year where reality meets the harsh world of fundamentals. I will let you decide: scenario 1 or scenario 2? Or is there a third option, like the one promised by Clinton, Blair, and Abe? It's unlikely, but I'm open to surprises.

You can use the above scenarios to adjust your strategy for 2024. If you think scenario 1 is only 20% likely, then your expected return would be:

(0.2 * -50%) + (0.8 * 20%) = -10% + 16% = +6%

If it's 30% and 70%, then your return would be: (0.3 * -50%) + (0.7 * 20%) = -15% + 14% = -1%

Just to give you an idea of the stakes involved.

Personally, my gut feeling based on the macroeconomic situation is that scenario 2 will happen in the first half of the year. The economist in me, however, is 100% behind scenario 1. So, don't worry, you're not the only one who's frustrated over where the market is heading.

Good luck in 2024!
Steen Jakobsen, CIO, Saxo

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.