The Dow Jones (US30) index witnessed significant fluctuations in 2023, experiencing major sell-offs in March and October. However, the year concluded with the index reaching an all-time high at $37,615.7.
Expectations of a consistent series of interest rate cuts by the Federal Reserve led markets to anticipate further increases in American stock indices in 2024.
In reality, there is only a 10% chance of a rate cut at the Federal Open Market Committee meeting in January 2024. However, expectations for a rate cut in the March meeting rose to over 70%.
Only 3% of investors believe that the federal funds rate will remain unchanged at the current level of 5.25% to 5.50% in the May meeting.
I believe the most common outlook by the end of 2024 is a cumulative 150 basis points cut. This would reduce the federal funds rate to a range between 3.75% and 4%. In my view, with a decrease in the federal funds rate throughout 2024, yields on U.S. Treasury bonds are expected to decline as well.
This is likely to prompt many institutional investors to shift from fixed-rate investments to stocks, serving as an upward force on the Dow Jones index in the medium and long term.
I also believe that Dow Jones’s position as a value indicator will be a good way for many cautious investors who have been waiting on the sidelines since 2022 to re-enter the stock market.
Especially, technology stocks, which are crucial components of the S&P 500 and Nasdaq indices, are expected to benefit significantly from the drop in Treasury yields. These stocks tend to rely more on low interest rates to fund their growth strategies.
While I anticipate a volatile market environment due to increased primary risks, I think the next couple of months will see the beginning of price fluctuations in stocks, including upward movements at bottoms and strong demand zones, which are usually good for investment.
However, the fundamental risks facing the Dow Jones index in 2024 are the resurgence of inflationary pressures or a significant decline in corporate earnings. Most economists expect inflation to continue its decline toward the central bank’s target of 2%.
Thus, this substantial investment inflow is likely to support the continued rise of the Dow Jones index as investors seek a safer path to re-enter the stock market. Additionally, a potential interest rate cut, as expected, will lead to higher valuations for many stocks, further supporting the rise of the Dow Jones index.
Finally, 2024 is a presidential election year in the United States. During such times, markets typically achieve gains as governments tend to be more open to stimulus during election campaigns. This supports the strength of the rise in American stock indices as the new year approaches.