This week, in honor of the late Byron Wien, BofA released a list of 10 potential market and macro surprises for 2024.
Most readers likely read Wien’s annual surprises lists over the years, or are at least familiar with them. If not, Google them. They’re famous. Not in a George Clooney kind of way, but in the way these sorts of things are famous.
“It’s a worthwhile exercise to think of scenarios that some investors may have not considered, or have assigned a very low probability,” BofA’s Jared Woodard wrote, on the way to “offer[ing] some plausible surprises that could affect markets this year,” again in a tribute to Wien.
If you’re steeped in market news, you might’ve already seen this list, but one thing I’ve learned over the past seven years is that the average investor doesn’t consume toxic levels of research every day, which means I’m often wrong when I make assumptions about what people have and haven’t come across.
With that in mind, it’s worth recapping BofA’s list.
The first prospective surprise entails a shock tax bill for bond investors, prompting a rotation into relatively tax efficient, long-term equity holdings.
Almost $4 trillion poured into T-bills and bonds during the first three quarters of 2023.
“As tax bills come due this year, we suspect some investors may come to appreciate the merits of equities, especially the lower tax rate of 20% on stocks held for at least one year,” Woodard remarked, adding that “Treasury coupon payments are taxed at ordinary income rates [and] all of the 2023 returns from Treasurys came from coupons.”
The second potential surprise is (or, more aptly I suppose, could be) fewer bankruptcies than expected despite the rapidity and scope of the rate-hiking cycle.
“The number of firms declaring bankruptcy [is] the second lowest in modern history,” Woodard marveled, juxtaposing that with the Fed’s rapid tightening efforts.
“Corporate interest expenses are just 7% of profits, the most favorable level since 1957,” he went on.
The third surprise could be a rambunctious return of IPO activity after the slowest year since the dot-com bubble popped. Wall Street executives spent the last ~three quarters predicting an ECM revival. We’re still waiting.
BofA’s fourth surprise involved the suggestion that Japanese stocks could be the best performing equities. The Nikkei hit its highest levels since the go-go years this week. “Less than 24 hours after a 7.5 magnitude earthquake, bullet-train lines were running again in the same region,” Woodard noted, calling the Japanese economy “resilient, undervalued” and on track to become more productive.
The fifth surprise may be a geopolitical shock to the Magnificent Seven which, Woodard observed, “use Taiwanese manufacturers for over 90% of their chips.” The correlation between those seven stocks (which comprise around 30% of US market cap) to Taiwan Semiconductor is 66%, an all-time high.
Bluntly: If there’s a war between the US and China, US equities are exposed through the Magnificent 7 channel. “The whole US stock market is more sensitive than ever to any geopolitical escalation that disrupts the supply of semiconductors,” BofA cautioned.
The sixth surprise could find biotech and pharma stocks hitting records on, for example, Alzheimer’s progress.
For the seventh potential surprise, Woodard suggested investors could “get pragmatic about energy.” He noted that wind and solar shares haven’t done well in light of “unworkable” economics around some projects. “Supply is tight and fragile after years of underinvestment in reliable baseload resources,” he wrote.
The eighth surprise found Woodard regaling investors with all the ways inflation might go to 5% instead of 2%. I won’t walk through them. He summarized: There are “any number of ‘imperfect endings'” to the disinflation story.
The ninth surprise would be a scenario in which investors continue to demand more compensation to own government debt — so, a higher term premium.
Finally, the tenth surprise would find investors “fall[ing] in love again with free markets.” I’m not sure anyone ever fell out of love with free markets, or at least not in America, which is just one giant cult of capitalism.
Woodard elaborated. “As the US election approaches, prospects for a friendlier business environment could raise investor expectations for higher profits and productivity, stoking animal spirits and prompting a greater allocation to equities,” he wrote.
And that’s it. Who’s potentially surprised already? (That’s supposed to be funny.)
