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2024 will mark my 40th year on Wall Street. I started out at Morgan Stanley (NY, Tokyo, and Hong Kong), County Nat West (NY and London), Merrill Lynch and then since 2002 at the helm of my own firm, LakeView Asset Management. Just a few days ago, I had a nice chat with my mentor, Gregg van Kipnis for who I worked for at Merrill Lynch for a brief time and then at County Nat West. We had a wonderful conversation, and I could hear in his voice how proud he was of my career after I ventured out on my own. There is much that I learned from him and continue to apply in my money management skills.
The past four years, 2020-2023, the COVID and post-COVID years have been without a doubt, the most difficult period over these past forty years. This comes from someone who experienced the 1987 Stock Market Crash, the Friday the 13th UAL Mini-Crash in 1989, a few wars, the Russian Coup, the Tech Bubble Bust, 9/11 and The Financial Crisis. The Financial Crisis was the scariest of those episodes but only lasted two years. I expect that 2024 will have some return to normality, yet there will be many variables which will influence the financial markets. With that said, herein is My Gut Feeling For 2024:
1. Wall Street analyst’s expectations appear to be quite disparate in their expectations for 2024. Of course, perma-bears and perma-bulls will sit on the tail ends of the bell curve, but everyone else fits in between those tail ends. There are neither fat tails (leptokurtosis) nor a tall hump (camel distribution). That’s a good thing for professional investors because more than ever, stock picking and strategy mix selection will be more important than indexing.
There will be four main variables/events which will steer the course of financial markets this year. First is monetary policy of the Federal Reserve Open Market Committee (FOMC) which I will cover below. Second, volatility is likely to pick up a greater pace, more akin to that of 2021. Because of that, I expect more market swings both up and down. Next are the 2024 national elections – both for the White House and Congress. Finally, the Israel-Hamas War and other existing wars. The 2023 Standard & Poor’s 500 (SPX) consensus earnings estimates range from 215 to 225, as we still have one more quarter yet to report, we cannot be certain as to where the final figure will land.
Using the midpoint of 220 with the SPX closing last year at 4,769.83 implies an index price/earnings multiple (PE) of 21.68. If we throw out the low PE of 2018 and the high PE of 2020, 2023 came in at about where most other years were over the last decade. With the yield of the 10-year US Treasury at around 4%, that PE Ratio is reasonable, using the bond equivalent PE ratio of 25. Had rates not peaked in 2023, then I would say that the SPX was overvalued coming into 2024.
Looking ahead to 2024, Wall Street consensus estimates for the SPX earnings is about 245. Applying a consistent PE ratio of 21 arrives at a target price of 5,145 for the SPX, an annual increase of 7.43%, which is just below the long-term average increase for the index. Now I must throw into the equation some historical data for recent presidential election years. The SPX lost 38.49% in 2008 (the Financial Crisis year); gained 13.41% in 2012; rose 9.54% in 2016; and, surged 16.26% in 2020. So, all considered, I am going to jiggle my target for the SPX up a little to 5,267, an annual gain of 10.42%.
2. The Federal Reserve Open Market Committee (FOMC) had embarked on a two-year long tightening cycle to try to bring down three-year long rapid economic inflation. So far, the FOMC appears to have achieved its goal and hinted that it was getting ready to end interest rate hikes and perhaps begin to bring rates down. According to the dot plot, an estimate of FOMC member projections, estimates point to two-fifty basis point rate cuts in 2024. FOMC two-day meetings take place in January, March, April/May (crossover), June, July, September, November (just after the election) and December. First, keep in mind that the FOMC does not like to influence elections, so take any action in September off the table. I am expecting 75 basis points in rate cuts in 2024: 25 basis points in June or July and then 50 basis points after the election.
3. As for US Treasury securities and bonds in general, the question becomes does the yield curve remain inverted or does it normalize to an upward sloping curve? Right now, 2s-10s are about 3/8% inverted. In plain English, that is, yields on the 2-year Treasury are 3/8% greater than that of the 10-year Treasury. Between 3-month and 30-year, the ends of the yield curve, there is an inversion of about 1 1/8%. FOMC action will lower the short end by 75 basis points. I am not quite confident that we will have an upward sloping curve by the end of the year, rather I expect a flattened yield curve.
4. The recession question was answered in 2023 for which I have written about several times. The question for 2024 is hard landing or soft landing? You can have both without creating a recession. In a soft landing, economic conditions weaken but only gradually. In a hard landing, economic contraction is much more pronounced and dramatic. My money is on a soft landing.
5. Growth stocks had a banner year, one not seen since the tech/dotcom boom of the 1990s, with one major difference. In 2023 the tech leaders had solid earnings and generated large caches of cash. The “FANG” stock acronym was replaced by the Magnificent 7: Alphabet (GOOG, GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA). These are all big weights in the NASDAQ 100 (NDX). Not only did these stocks surge but they have had fantastic returns over the past decade. So long as the earnings growth continues for these stocks, and I expect that it will for most of them, then even selling at high PE ratios, the stock prices will continue to outpace the SPX. Let’s not forget the long-term trends in AI and obesity/diabetes treatment. AI is embedded in the Magnificent 7 stocks while you can look to Eli Lilly for obesity/diabetes care. I have two caveats. First, expect some early year profit taking as investors push capital gains into 2024. Second, I am less enthusiastic about AAPL than I was in the past. We have owned AAPL since 2005 but have reduced our exposure to the stock in 2023.
6. Dividend / Value stocks experienced weakness in the first half of last year but awoken in the 4th quarter when the FOMC signaled that interest rates would likely decline in 2024. I am expecting our benchmark index S&P 500 Low Volatility / High Dividend Index to rise double digits in 2024 after a 3.28% decline in 2023 (we outperformed the index by a wide margin in 2023. Please contact us for Performance Results).
7. Small Capitalization stocks will be leaders in 2024. While the S&P 600 (SML) gained a not too shabby 13.89% in 2023 it did underperform the SPX and the S&P 400 MidCap Index (MID) which rose 14.45%. I think in 2024 we will flip the script with leadership in the SML whilst the MID and SPX will be laggards. I began to move assets in our Growth Portfolios into Small Cap stocks in the 4th quarter of 2023 and am looking for more candidates to purchase.
8. Inflation rates will continue to stabilize but will remain at or near a pesky 3% level for 2024. Remember though that consumers are still absorbing the huge inflationary prices of about 18% in total over the last three years.
9. In Politics I have a few expectations / surprises (this section is always meant to be speculative and controversial, so if you don’t like it, get a sense of humor):
- Biden will not run for reelection and if he does, he will lose. There will be pressure for him to step down and let a younger more vibrant Democrat (not Hillary Clinton) take the nomination. Should he run, he will be pressured to change Vice Presidential running mates. The Republican ticket will be Donald Trump and a woman to be named later. I am going to speculate that it would be Arkansas Governor Sarah Huckabee Sanders. Georgia will be the swing state to determine the winner of the election.
- Jeff Bezos will run for Senate representing the State of Florida and lose.
- Fearing that Donald Trump would win the Presidency and with the rest of the world eyeing wars in Ukraine and Israel, President Xi of China will invade Taiwan before the election takes place. If so, that will only bolster Trump’s chance at reelection.
- In Congress, we will see a double flip whereas the Republicans will take control of the Senate while the Democratics regain control of the House of Representatives.
- Prince Harry and Meghan Markle will officially separate, and Harry will return to his homeland.
10. In sports, the Vegas Golden Knights, to my disappointment will not repeat as Stanley Cup Champions, losing to the Boston Bruins in the cup finals. The Detroit Lions will win their first ever Super Bowl here in Las Vegas. The Los Angeles Dodgers despite spending the GDP of Costa Rica to sign Shohei Ohtani and Yoshinobu Yamamoto will not win the World Series. Rather, the Baltimore Orioles will win the World Series for the first time since 1983. In the NBA, I could care less.
Related: To: Millennials, From: Jerome Powell