How Could the Markets Surprise Us in 2024?

Byron Wien recently passed away. He was a true Wall Street icon. I had the good fortune of meeting Mr. Wien once when I was seated behind him at an investment conference during the depths of the Great Financial Crisis (GFC). Mr. Wien was probably best known for his annual top ten list of surprises for the year ahead. He defined a surprise on his list as something that the average investor would only assign about a one-in-three chance of occurring, but that he thought was closer to 50/50.  I always thought this was a useful exercise. Markets have a way of habitually surprising us and proving the conventional thinking wrong, so having an idea of where the potential forks in the road may come just makes us better prepared and informed as investors. 

Below is my compilation of five potential surprises for markets in 2024. Mr. Wien would do 10, but I reduced it to five for the sake of brevity. Please remember these are not all meant to be seen as forecasts or base-case views, but rather a thought exercise around potential risks and opportunities that the markets might be overly discounting in 2024. 

Five Surprises for 2024 (in no particular order) 

• Inflation doesn’t ride off into the sunset. Perhaps the most consensus opinion out there at the moment is that inflation has been defeated. Lingering butterfly effects from the COVID-19 years, severe neglect in commodities-related capital expenditures, significant fiscal stimulus still percolating through the system, and an escalating geopolitical situation warn inflation might not be so easily tamed. Inflation historically happens in waves, so another impulse would not be out of character with the historical precedence.   
• AI optimism takes a breather. The move in Artificial Intelligence (AI) stocks has been relentless and has drawn many comparisons with the dot.com boom. It is almost impossible to handicap the proliferation of a new technology, but assuming AI is the real deal and using the 1990s and other historical examples as a guide, then the likely path is to get an initial boom followed by a material correction of some sort. The next advance that then follows is where the real winners of the new technology are determined. The current first wave in AI is arguably long in the tooth, but admittedly these things can last longer than anyone thinks possible, so maybe it is more of a 2025 story, but there are certainly some risks that the first wave finishes this year, and the AI theme enters a winter period.     
• Chinese equities surprise to the upside. The economic situation in China is clearly not good, but everyone knows that, and a lot of the negatives have already been priced in. Chinese policymakers are not at all incentivized to pursue a laissez-faire approach here. As the old trading floor saying goes, “markets stop panicking when policy makers start to panic.” That moment probably happens sooner than later, and Chinese equities could get a decent tailwind.   
• U.S. longer-term bond yields bottom quicker than most would expect. The secular bear market in bond yields looks to have ended in 2022. As a result, yields shouldn’t be as predisposed as they once were to head for levels much lower than 3% in the 10-year, even in the event of recession. If a multi-year trend higher is emerging as the charts suggest, then the risk is that longer-term Treasury yields find a floor sooner than later (months instead of years) and fiscal/supply concerns come back into focus as soon as the second half of this year.    
• The U.S. dollar continues to confound.  On paper, the dollar should be lower. Historically, rich valuations, shrinking interest rate differentials, internal U.S. political strife, and growing fiscal concerns are just a few of the reasons people give for why the dollar should be weaker. However, what makes currencies different is they are priced relative to each other, and in many ways the dollar is still the “least dirty shirt in the laundry basket” when viewed from this perspective.  Being the world's reserve currency comes with many privileges, not least of which is the favored destination of global capital during times of geopolitical and global economic uncertainty.