Asset allocation, the two market scenarios for the first half of 2024

The festival of global investment houses has already begun, and with some advance, in the recurring but useless attempt to make forecasts on the market trend for next year.
After all, even without going too far but just one year ago, we can reread the forecasts – all negative – for 2023, and instead we find ourselves today with an S&P 500 which marks an increase of around 18%.
This does not mean that it is not appropriate to imagine what could be possible scenarios, aware however that there may be geopolitical or other events which are absolutely not predictable, and which can radically change any future estimates and prospects.
And I think that from 2020 until today, between Covid and Wars, we have many examples in this sense.
I will try to take a snapshot of where we are today and what the two most probable scenarios are for the first half of 2024, trying to simplify each concept as much as possible.
November was a positive month for the stock market and even more so for the bond market, thanks to the sharp drop in yields.
It is likely that the S&P 500 and the other indices will be able to hold their positions until the end of the year, and may still recover something.
This is supported not only by the technical analysis of the indices, but also by year-end statistical elements.
Returning to the markets, in Europe there is a decrease in inflation beyond expectations, and this also at a global level, so much so that the Global Aggregate Bond index, which includes bonds issued by emerging and developed markets throughout the world with an Investment Grade rating, it jumped by 5%, and such a strong movement had not been seen since the mid-1980s.
The positive trend – as you can see from the graph – can also be found on BTPs, because the drop in yields was widespread across the entire bond market.
However, I feel the need to remember that our country's excess debt, which has a very strong link with the banking and financial world, is a risk factor to consider.
And, contrary to what is happening in this period, this can lead to a widening of the spread.
I'm not saying not to buy BTPs anymore, but only that the fragility of our system must always be an element to consider in investment choices.
As regards the American market, the FED's Beige Book was released this week, from which it can be deduced that growth is slowing down, consumers have become more sensitive to prices, there is a decline in demand for durable goods and transport while the tourism sector is the only positive one.
Indicative is the decline in the demand for mortgages in the residential real estate sector and an increase in the availability of unsold property.
All this, together with a decline in labor demand, indicates a deteriorating scenario.
To move on to the two possible scenarios, here is what I think: 1) The drop in inflation above expectations, together with disappointing macro data but with a currently positive economy, prefigure a soft landing scenario which is currently the most probable.
In this case we will see a first rate cut between April and May 2024, which will be repeated with any further and subsequent signs of a slowdown in the economic situation.
2) But what would happen if we had a hard landing which, although less likely, cannot be completely ruled out? In fact, if you think about it, a sharp drop in inflation could actually be due to a stronger than expected economic slowdown.
In this scenario which, I repeat, is less likely, Bonds would have a further stimulus due to cuts by more aggressive Central Banks, while the stock market, at least in the first phase, could undergo some downsizing.
What would be positive in this scenario? Certainly the return of a negative correlation between Bonds and Equity, an essential element for making the diversification of investment portfolios effective, with bonds performing their hedge function on the equity components.
2022 caused all portfolios to suffer because every asset moved in the same direction (positive correlation), and in the same way, in this phase, we benefit from it on both fronts because equity and bonds are still moving in the same direction, and in in this case positive.
This phenomenon will continue to accompany us in the future.
And yet this is not normal, and every component we use – shares, bonds, raw materials, currencies, liquidity – provides each adequately diversified portfolio with a benefit that translates into a clear reduction in risk for the same expected return.
A portfolio is a complex system but, at the same time, while asset allocation choices must be simple, they are never easy.
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