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After three years of pandemics, wars, and unpredictable markets, it’s exciting to be at the start of a new year full of opportunities in the stock market. That said, 2024 may still have some challenges, including lingering inflation.
So, let’s review the latest inflation data to gauge what’s in store for the Australian economy in the first quarter of 2024.
Last Wednesday, Federal Treasurer Jim Chalmers announced that the inflation rate had fallen from 4.9 per cent in October to 4.3 per cent in November. While this is a notable difference, it doesn’t mean that the price of goods and services will fall, it just means that they’re not rising by as much as the previous month.
This is welcome news, especially for mortgage holders who are likely to see light at the end of the tunnel with the relentless interest rate hikes. However, the figures show no reprieve for those renting, given that there was an increase of 8 per cent to the cost of rent in the monthly CPI data for November.
As inflation cools and the probability of further rate rises diminishes (with talk of rate cuts starting to increase), now is a perfect time to discuss what we can expect from the Australian stock market this year.
Easing inflation is often viewed positively by the stock market because controlled inflation can indicate a growing and healthy economy. We want inflation as this increases investor confidence, but we don’t want it to be too high.
As confidence increases, money starts to flow from fixed-income securities to the stock market, which is why I believe we will see a sustained rise in the market over the next year as the big end of town increase participation. The more they increase their holdings, the more it drives the market, and the more retail investors get involved, and so it snowballs.
Positive consumer sentiment also increases with lower inflation as consumers feel more confident about their future purchasing ability. An increase in consumer spending is always a welcome sign for ASX-listed companies as it directly impacts their bottom line in a positive way. As corporate earnings increase, so does the price of company shares.
With inflation falling, companies can also experience lower or more stable input costs, such as raw materials and labour, contributing to improved profit margins. The talk is that rates will not be cut until the second half of 2024, but companies will see this as positive. When borrowing costs are more attractive, companies are more willing to invest in business growth.
Finally, as Australia relies heavily on exports, currency stability is important for international trade. Lower inflation contributes to a more stable Aussie dollar, benefiting listed companies that engage in global trade. Some of the top companies in the ASX are big export miners such as BHP Group (ASX:BHP) and Rio Tinto (ASX:RIO), which I anticipate will do quite well this year, and which is why I’ll be keeping a close eye on the Australian share market, as it’s looking poised for a positive run.
What’s next for the Australian stock market?
What an interesting year 2023 was for the Australian stock market; after rising strongly in January, it turned to fall for nine months, before rising strongly in the final two months of the year. This is quite unusual, and in hindsight, if you were not invested, you probably were not too concerned. If you were, then you were most likely a bit frustrated.
The good news is that I believe 2024 will be a different story; in fact, I think the next few years will be vastly different to the past few years. It is often said that what happens in January often dictates the rest of the year, however, January 2023 was not a good indication of what transpired throughout the remainder of the year. Currently, in January 2024, the All-Ordinaries Index is down just over 1 per cent, which in the wake of two very strong months, is to be expected.
Right now, the signs are that 2024 will be a good year and will likely be the start of a new bull run lasting a few years. Right now I like Financials, Energy and Materials stocks for this year. Good luck and good trading.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au
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