The Vanguard Materials Index Fund ETF Shares ETF’s (NYSEARCA:VAW) more than 10% year-to-date surge suggests materials stocks shined in 2023. However, a closer look at the matter shows that intra-sector performance is divided. Moreover, various influencing market dynamics have emerged, indicating that forensic analysis is required before initiating material stock positions for 2024.

A sector-based analysis is usually top-down. However, the materials sector is diverse, meaning a bottom-up vantage point is essential. Thus, I collated and discussed three factors that run through the sector’s and its constituents’ entire value chain.

Without further ado, here are three factors that may influence the materials sector in 2024.

The Interest Rate Cycle

Although not the only influencing factor, monetary policy usually dictates short-term cyclical growth. Therefore, the interest rate cycle is salient to the performance of materials assets.

The general rhetoric is that a global interest rate pivot will occur in 2024, which can be corroborated by looking at the inversion of global yield curves. However, the question becomes: Will interest rate pivots rejuvenate demand for materials?

I cannot address the question with absolute certainty. However, it can be stated that a rate pivot will decrease the cost of household liabilities, galvanize corporate borrowing, and allow commodity traders access to leverage. Moreover, inflation rates in the United States, Europe and China pulled back this year, suggesting early-stage inflation may occur late next year, concurrently spiking material prices. As such, an isolated study of the interest rate cycle and materials suggests relentless performance is likely.

Sector Break-ups

Another factor to consider in the materials arena is its different sub-sectors. Materials, as a phrase, is a production-based outlook. Thus, trivially speaking, the sector’s end markets aren’t homogenous. For example, it is often witnessed that gold and oil prices are inversely related. Although I can name a bunch of negative correlations, I want to extend the analysis into a few of the main themes I see occurring in 2024 instead of pondering on juxtapositions.

Firstly, it must be considered that an interest rate pivot will likely lower demand for U.S. bonds. A shift in capital account dynamics may lead to a selloff of the greenback and give rise to gold as a reserve currency proxy. Moreover, recession risk remains rife, lending the argument that investors will flock toward gold as a safe haven asset.

Furthermore, oil and gas prices remain uncertain. JPMorgan (NYSE:JPM) thinks crude oil and natural gas will reach $83 and $3.34 per unit in 2024. I’m somewhat in favor of JP Morgan’s analysis. The U.S. Energy Information Administration expects production to slow down next year due to voluntary supply cuts. In addition, an interest rate pivot could come into play as a demand-side factor. Nonetheless, I would be careful here as fossil fuel prices are highly volatile and susceptible to unexpected conviction from market speculators.

Lastly, let’s look at food, timber, and base metals.

As the world food price index’s trajectory suggests, food commodities such as grains and livestock may taper due to a leveling in supply and demand factors, which got sent out of equillibrium during the Covid-19 pandemic and the the Russia-Ukraine war. Furthermore, base metals and timber could receive moderate support from the interest rate cycle factors mentioned earlier. I am, however, concerned by the secular political pressure against timber-based products.

Valuations

I phased this section into the article for investors seeking materials stocks instead of speculation of standalone commodities. Financial markets are mean reverting by principle. Thus, valuation is salient to any asset’s prospects.

State Street collated sector valuations in a research report released in November. The report ranked sector price multiples relative to the S&P 500, whereafter scores were assigned to each enclave. State Street’s findings show that the materials sector is grossly undervalued versus the S&P 500 due to superior price-to-book and price-to-sales ratios. Moreover, the materials sector is undervalued on an absolute basis if looked at from a price-to-book perspective.

Vendor-based data must be scrutinized and considered as part of a holistic analysis. However, State Street’s valuation metrics make sense given the aforementioned factors relating to interest rates and sector break-ups. I see tremendous value in materials stocks as book values could rebound in 2024 due to lower cost bases and diminished company-specific discount rates. These influencing market dynamics really are painting a picture.

Conclusion

In essence, the materials sector’s valuation multiples are well-aligned and supported by fundamental resilience. Although risk factors such as a potential recession and sustained geopolitical tensions must be considered, the net proponents for materials outweigh the opponents. With these influencing market dynamics, we can make a decent judgment call on the materials sector. As such, I’m bullish on the sector going into 2024.

On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.