End Of The Year Review
If anyone had asked in 2022 how we see 2023 shaping up, it would have never come into our minds that it would turn out the way it did. But let’s be honest, this is the case with most years. Many skeptics worried that the planned further rate hikes from central banks in developed countries would hurt the stock market going into 2023. But after the first half of the year, the stock market became resilient to rate hikes, as investors understood that inflation seemed to be under control and central banks might not go for any more aggressive hikes. The Federal Reserve had a task at the beginning of 2023 to bring inflation down. The job was to drive it to the 2% target as close as possible. It looks like it worked because after 4 rate hikes, the U.S. headline CPI was slashed in half, going from around +6.4% to +3.2%. This helped push the risky assets, such as stocks, higher.
The top U.S. indices were seen to be riding a roller coaster ride during mid-2023. Still, at the end of October, it looked like DJIA, the S&P500, and the Nasdaq would be set to close the year in negative territory. However, the Santa Claus rally came earlier than usual in the first days of November. The indices went back to their 2023-year highs again. At the time of writing, two of the top three U.S. indices have now tested their all-time highs, but the S&P 500 is still on the way to potentially doing that.
But the market is always dissatisfied. Given that inflation was able to fall significantly, market participants are now worried that we might see deflation showing up on our doorstep. Maybe that’s why the Fed started hinting at possible rate cuts in the first half of 2024. The market expects three Fed rate cuts by the middle of next year. This could be seen as a positive for the stock market. However, traders and investors might see this as a sign of worry. Why?
As we mentioned above, U.S. inflation has been on a gradual decline. However, it is still nowhere near the Fed’s 2% target. Also, with the recent strong rallies we saw in the top global indices, inflation could possibly curve back up again in the near term. This is where Mr. Powell may revert to the old language that they are ready to step in again and use all their tools to bring inflation down again. And we know that the primary tool for that is raising rates. This language was used during the last Fed press conference in December. The previous Fed’s press conference after the rate announcement was somewhat of a mix of telling the public that rate cuts are coming but also reassuring that the Fed is willing to tighten its policy if needed. This might have sent some mixed feelings to investors, which are reflected in the slower pace of acceleration after the event.
But what worries us now are the three potential rate cuts before mid-2024. If the focus is now on that, this forces us to think that the Fed may expect an economic slowdown next year. The possible upcoming rate cuts are there to help stimulate the market and lessen the impact of a potential economic slowdown.
Let's look at one of the widespread economic theories: the Presidential Election Cycle Theory. It states that there are four stages that the US market must go through. During the first year of the election, the stock market tends to be the weakest; then it recovers in the second one; during the third year, it shows excellent results; and during the fourth year, the upside momentum fades away. If we apply this logic, we can see that 2023 has been quite a good year, as it is the third year of the US presidential term. 2024 is the last year, as at the beginning of November, Americans will head to the polls. If we follow the logic of that theory, it comes in line with what was mentioned above about the possibility of an economic slowdown in 2024.
Let's touch on the oil market, for a bit. WTI oil has been on a roller-coaster ride this year because of many uncertainties in the market. Initially, we saw the price falling, mainly due to concerns of a possible slowdown in global economic activity and due to rising rates. Also, certain members of the OPEC+ group disagreed on production cuts, which helped push the price lower. However, as inflation continued to decline, the stock market reversed higher. Oil picked up more demand, and the price started gaining upside momentum. Saudi Arabia also fueled the rise which pledged to cut some output at the beginning of summer.
Around mid-September, WTI oil reached the area above the 90-dollar mark, hitting the 95 level. But straight after that, the commodity reversed south. At the time of writing, the price is below this year’s opening price, which is roughly around 80.50. Looking at oil’s current trading activity, the commodity might struggle to get back into positive territory by the end of this year.
Going into 2024, we may see some further declines in the price of oil. Reason? Since ecologists have come in strong on the idea of minimizing fossil fuel usage, this throws a shade on future demand, which may affect oil-producing countries. The world continues to focus on green energy and its development. Minimizing the carbon footprint helps further reduce oil prices as people try to shift away from that commodity.
All this works well while the global economy continues to run smoothly. What we mean by that is while we see steady economic growth, everyone is focused on how to make the world a better place environmentally, socially, and of course, economically. However, when the times are hard, the first two become less of a priority. That is where the near-term demand for oil could pick up slightly again. This may align with the US Presidential Elections theory discussed above, as we would be in the 4th year of the term.
Nevertheless, the upside scenario is still more of a short- to medium-term one. This is because if the economic downturn becomes a more severe one, this could throw a negative shade on all sectors, including energy.
The journey of gold throughout 2023 is also worth noting. The precious metal hit an all-time high in the first half of the year, reaching the 2081 area. After that, the upside price momentum slowed down as investors saw the commodity as too overbought. People started shifting back towards the stock market and the US dollar. Gold drifted closer to the 1800s again, finding support near the 1815 territory. But things changed when the tensions rose in the Middle East between Israel and Palestine at the beginning of October. That’s when the price reversed sharply higher, as the precious metal picked up its “safe haven” status again. The market was fearful of further escalations in the region. During October, the yellow metal gained an additional 200 USD per ounce. In the first half of November, we did see a decent correction of just over 70 USD. But that move was temporary before gold started adding more buying interest. On the first Monday of December, the buyers pushed the price into uncharted territory, hitting a new all-time high at around 2144.
For 2024, there is a chance that the commodity could establish new all-time highs. A weaker US dollar would be ideal for that, and combined with the weakness in the stock market, it could be a perfect cocktail for gold to drift higher. We have already mentioned the Fed’s position on possible rate cuts in the first half of 2024, which could bring potential weakness in the US dollar.
From the technical perspective, on the 4th of December, we saw gold hitting a new historic high, reaching the area near the 2144-dollar mark. This way, the precious metal surpassed its previous all-time high near the 2081-dollar mark reached in April of this year. That said, before the EU market opened on the 4th of December, the yellow metal fell back below that previous high of 2081. Since then, the precious metal has continued correcting lower, at one point briefly falling below the psychological 2000-dollar mark. For now, the commodity remains well below its current all-time high. If it continues to do that, we might see a larger correction lower towards the steeper long-term tentative upside support line drawn from the lowest point of November 2022. That said, if the price stays above that line, we could class that correction as temporary before another leg of buying.
Even if the price continues its journey south, it may find support near the 1933 hurdle, marked by the lowest point of November. Around that area, gold could also test the steeper upside line, which may act as additional support. If that happens, the bulls could take advantage of the lower price, possibly sending the commodity north again. That’s when we will aim for the 2081 territory again, a break of which may lead to a re-test of the current all-time high, at 2144. If that hurdle breaks, this will confirm a higher high, placing the commodity into uncharted territory. That’s when we will use the help of our Fibonacci extension tool to try to find our next possible resistance target. Our chart shows that the next potential target is at 61.8% extension, around the 2180 level.
Alternatively, if the precious metal breaks the steep upside line, this may signal a more significant correction to the downside. That’s when we will aim for the 23.6% area on our Fibonacci extension, roughly around the 1830 level. Slightly below it, we have another potential support area, near the psychological 1800 zone. If that zone cannot break the fall, we will examine a possible test of another long-term upside line drawn from the lowest point of August 2018.
Based on everything we mentioned above, we can try to build a possible scenario for 2024 roughly. We may see a weaker stock market, US dollar, and continuous demand for precious metals. Also, we should have mentioned that there might be some interest in other safe havens, such as the Japanese yen and the Swiss franc. Markets tend to turn to them when value is no longer found in riskier asset classes, such as stocks.