Recently, I came across one of those broadcasts where analysts from the big Wall Street firms were making their predictions for 2024.
After the usual questions (what’s hot, what’s not), the interviewer asked them one by one where they thought the S&P 500 would be trading at the end of 2024.
The analysts shared estimates ranging from as high as 5500 and down to 4200. One of the super bears even called for a 50% crash.
I’m not in the super-bear camp. But I must admit that I am slightly partial to that position.
Because one thing is for sure… After a year where the market just dragged investors happily along, it won’t remain this “easy” forever.
2024 will be far more challenging for investors.
So today, let’s take a look at the year ahead…
A Lot of Room for Downside
The S&P 500 rallied hard several times in 2023. And some seemed to believe this party could go on forever.
But 2023 also saw some major swings and brutal reversals.
Stocks burst out of the gates at the start of 2023 before reversing sharply in February. That initial move was normal after such a negative 2022.
But after that sharp fall, equities snapped higher again and rallied strongly through July before rolling over. The market drifted lower from its July highs – and further sold down mid-October with the Israeli conflict and higher rates taking their toll.
And then we saw yet another major swing with the huge surge higher starting in late October.
Over a month later, the market was still flying… The S&P 500 and the Nasdaq rallied 15% and 17%, respectively, into mid-December
But it’s not just stocks that saw these major moves and reversals. We’ve seen it in bonds and oil and gold as well.
And in stocks, I think the first major leg up could set 2024’s peak.
The market remains convinced that rate cuts are on the way in the first quarter of 2024. It believes that big tech earnings are going to continue to grow.
That’s caused investors to pile into stocks. And you don’t want to bet blindly against that momentum.
But with stocks trading at excessive valuations and overbought, there’s a lot of room to the downside.
That’s making the market increasingly vulnerable to a correction – especially with such a huge concentration risk posed by the Magnificent 7 (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla).
The equal-weighted S&P 500 (which gives all constituents the same weighting) has significantly underperformed the regular S&P index, even trading flat for the year in November. If you take those mega-cap tech stocks out of the equation, a large chunk of 2023’s returns evaporate.
So if the Magnificent 7 receives any downward ratings, that has obvious negative implications for the broader market.
But that’s the crux of the matter that the out-and-out bulls seem to ignore.
Nearly a dozen or so interest rate increases must have had an impact and be slowing the economy. If not, we would have even more rate rises ahead.
Yet the market is pricing the Magnificent 7 stocks as if growth is going to continue unabated.
At some point, something has to give.
The way I see it, the whole Magnificent 7 is vulnerable. And that will impact the whole market.
A Challenging Market
The rest of the market is betting on interest rate cuts in the first quarter of 2024. But I don’t see any rate cuts until at least the second half of 2024.
The Fed has missed everything. It was hopelessly late in admitting inflation wasn’t transient. And then it had to increase rates rapidly.
The last thing the Fed wants to do is cut too early.
Inflation is coming down. But we’re still some way off the desired 2% target. And the Fed getting its timing wrong would set the whole inflation cycle off all over again.
That could lead to even higher rates down the way. And it would smash any prospect of the Fed’s much-desired soft landing.
So the market battle will be fought between interest rates and earnings growth.
While the market could start 2024 with a brief rally, I think we’ll see the market reverse much lower. That peak in the first quarter will likely be its top for 2024.
From there, I expect several tradeable swings with the major indices finishing out the year well below that early high.
In November and December, we’ve seen the early stages of a rotation into old-name industrial stocks (even small- and mid-caps) as the “smart” money reduces its exposure to Big Tech.
Ultimately, it’s this smart money that drives the markets.
So while I don’t see a full crash per se, I see down legs followed by counter-rallies. And the good news is these moves will provide plenty of trading opportunities in this challenging market.
Trading both long and short will be critical to making money.
And it’s not just equities where I see some great opportunities in 2024…
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More Opportunities
Bitcoin rallied from around $34,000 up to over $42,000 in a short time heading into December.
But as we know, bitcoin can also reverse dramatically. As it reaches new heights, we could generate profitable short trades as we look for reversals.
And delayed interest rate cuts will impact the U.S. dollar (USD) as well.
All else being equal, lower rates typically lead to a lower dollar. But with everyone already short the USD, they could get caught if the Fed delays cuts. So we’ll be looking to play the USD long into that setup.
The other market we traded a lot in 2023 is oil.
Despite some big swings in the oil price, West Texas Intermediate (WTI) crude traded below where it was at the start of the year in December.
That comes despite a series of OPEC+ production cuts and a range of geopolitical events – including war in the Middle East and the Ukraine.
There is always the risk of other geopolitical events in 2024 (as there is any year), but I think the mid-$60s is the pure low for oil unless we go into a massive recession. So for 2024, we will likely want to trade oil from the long side.
And there’s one thing I believe will be my best macro trade… The “yield curve” will steepen. When the Fed does start cutting rates, interest rates on the long end of the curve will go straight up.
And there’s a number of ways I’m planning to trade it. So stay tuned for that.
A Lot of Bumps
To reiterate, I don’t think 2024 will be a great year for the market. It could be a really tough year overall.
Everyone is calling for a soft landing, but I just don’t see that.
What I see is a lot of bumps.
So as always, we’ll respect the market and trade what’s in front of us. But I see tougher times ahead.
The good news is, even in bumpy periods, we can find lots of opportunities in trading stocks, bonds, currencies like we do. So even with my outlook, I’m looking forward to a very profitable 2024.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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