2024 Market Outlook: Cloudy With a Chance of Chaos
Fed’s inaction could put it behind the eight ball.
Jeff Sommer’s report, “Wall St. Loves to Guess, but Nobody Knows What the Market Will Do in 2024,” in the December 23, 2023 edition of the New York Times was an eye-opener for me. It confirmed my oft-repeated claims of the past couple years that most so-called “market experts” simply go with the flow — i.e., the prevailing short-term market trend in making their annual year-end forecasts for the following year. In my 2023 Market Outlook, I had pointed out how their 2022 forecasts — made at the height of a surging bull market in late 2021 — ended up being off between 12.7% to 27.5% lower, thanks to a severe bear market that began in January 2022 and ran through October 2022. So, by late 2022, most of these selfsame market experts had then turned decidedly bearish and their 2023 forecasts reflected this view. Mr. Sommer accordingly pointed this out in his above-mentioned report:
“At the end of 2022, strategists predicted that the S&P 500 would end 2023 at 4,078, a gain of 6.2 percent from where it started, according to data from Bloomberg.
At the moment, the market is above 4,700, a gain of more than 22 percent. These forecasts were so deeply off the mark undoubtedly because 2022 was a truly terrible year for stocks — and also one that most analysts totally failed to foresee.”
More of a rule than an exception!
As I had also written about these markedly bearish forecasts in my own 2023 Market Outlook essay, I was preparing to showcase these widely missed “expert” predictions — which have now occurred in back-to-back years (2022 & 2023) — in this year-end analysis. But thanks to Mr. Sommer, he not only saved me the effort, but also highlighted the fact that these widely missed annual predictions by market experts is more of a rule than an exception. Mr. Sommer further laments, “Yet Wall Street strategists make predictions anyway, despite a track record that is extraordinary in its ineptitude.” He goes on to point out that expert predictions were wrong by 23.3 percent in 2002, by 14.4 percent in 2018, and by more than 23 percent in 2022! In fact, Mr. Sommer reveals, “…the median Wall Street forecast from 2000 through 2023 missed its target by an average 13.8 percentage points annually — more than double the actual average annual performance of the stock market.”
2024 forecasts are comparatively subdued.
In its December 22, 2023 review, “Stock Market Forecast 2024: A Soft Landing May Not Bring The Gains You Expect,” Investor’s Business Daily notes that YE 2024 forecast for the S&P 500 by fourteen Wall Street firms range from a low of 4200 to a high of 5400 as shown in table below:
The average YE 2024 target for S&P 500 of 4938 is in line with those provided by CNBC (4881) in its December 18, 2023, report, “Official Wall Street outlook: Here’s where strategists see the stock market going in 2024” and by Business Insider (4832) in its December 18, 2023, report, “Here’s a complete rundown of Wall Street’s 2024 stock market predictions” as shown in tables below:
S&P 500 closed out 2023 at 4770 — which means the average of Wall Street predictions puts 2024 year-end S&P up by a little over 3 percentage points for the year! So, why aren’t market experts not following this strong bullish trend of the past couple months and making more optimistic forecasts for 2024? In its December 27, 2023 article, “The S&P 500′s eight-week winning streak could signal strong gains in the year ahead, history shows,” CNBC notes:
“Stocks are riding high at the moment, and that momentum could translate into big gains over the next year, if history is any indication.”
“Such streaks are usually followed by sharp gains over the next year. Since 1950, the broad market index was higher on average by 8.9% in the year following an eight-week winning streak, data analyzed by LPL Financial shows.”
Twice bitten, thrice shy.
Is it possible that their botched forecasts in back-to-back years have made these market experts twice bitten, thrice shy? Or are they simply acknowledging the fact that markets have been defying conventional wisdom in the pandemic era? I had alluded to this in the conclusion of my 2023 Market Outlooks as follows:
“We have already been through a once-in-a-century pandemic and U.S. financial markets have already baked in most of the fallout resulting from it. The ensuing C-suite of positive factors highlighted in this commentary make it increasingly unlikely that 2023 will be a second straight down year for the S&P 500. 2023, like 1983, is more likely to witness the dawning of another “morning in America,” whether the technical chartists and the fundamental analysts foresee it or not. Not because their data/analyses are wrong, but both, macroeconomic and geopolitical circumstances have been defying logic during the pandemic era and there is no reason to believe we will be fully back to normal market behavior in 2023.”
For interested readers, I have graded my performance — via tweet on December 26, 2023 — on how each of my 8 “C” factors panned out. In December 2022, I believed that this C-suite would influence stock market behavior mostly to the upside in 2023 and I was largely accurate.
Markets reflect current macroeconomic conditions, but Federal Reserve holds the key in 2024.
2023 has been like a Dickensian tale of two cities, in which the real economy thrived while its underlying indicators kept predicting impending doom. On the one hand, the macroeconomic picture has been solid — akin to my forecasted “morning in America” redux scenario — with actual data as follows:
· Real GDP for Q3 was 4.9%.
· Monthly nonfarm payrolls grew by 232,000 per month on average in 2023.
· Unemployment rate has been under 4% for 22 consecutive months.
· Annual inflation rate as measured by CPI was 3.1%, while average hourly earnings grew by 4% in November.
· During the 2023 holiday season — from Nov. 1 through Christmas Eve — U.S. retail sales rose by 3.1%.
On the other hand, recession indicators have been flashing a hard landing for a long time:
· The Conference Board’s Leading Economic Index (LEI) fell for a 20th consecutive month in November.
· The yield curve between the two-year and ten-year Treasury notes inverted in July 2022 and has remained inverted for 17 consecutive months.
· The Manufacturing Purchasing Manager’s Index (PMI) has been at or under 50 since May 23, 2023.
So, is it any wonder that market experts — who interpret these indicators to make their predictions — got 2023 so wrong? In fact, even the conventional “don’t fight the Fed” mantra was challenged by equity markets, which read the tea leaves quite differently from the market experts. While reining in “irrational exuberance” in equity markets is not the Fed’s responsibility, it’s time the Fed shifted its focus from its “keep prices stable” mandate to its “maximum employment” mandate. This might seem like a contradiction in terms, in that we have been at or near maximum employment throughout 2023. However, on a six-month basis through November, core PCE was up 1.9%, below the Fed’s 12-month target. So, it has becoming increasingly clear that real rates will only get more restrictive as inflation continues to plummet. This high cost of capital will negatively impact small businesses, which employ ~47% of all U.S. employees. In fact, according to the U.S. Chamber of Commerce, “Small businesses are credited with just under two-thirds (63%) of the new jobs created from 1995 to 2021 or 17.3 million new jobs.”
Fed’s rate-cutting window is narrow, and its timing is critical.
Therefore, to maintain the current state of near maximum employment, the Fed will have to begin cutting interest rates soon to avoid forcing a recession and/or hard landing. From a political standpoint, Fed will need to start cutting by early spring 2024. Since the Fed — to maintain its apolitical posture — won’t typically cut rates about two months prior to a presidential election. The Fed thus has a six-month cutting window (April-September) for three to four cuts totaling a minimum 100 basis point reduction in the federal funds rate from its current range between 5.25 to 5.50.
If the Fed gets it right — i.e., successfully manages its dual mandate — equity markets will respond accordingly and favor the experts who have predicted 2024 S&P 500 year-end targets at the higher end of the range in the tables shown above. If the Fed gets it wrong — not managing an acceptable compromise between price stability and full employment — equity markets will tank and favor the experts who have predicted 2024 year-end targets at the lower end of the range. If the Fed gets it somewhere in the middle… it is likely we are closer to the average year-end S&P 500 target of ~4900. But, in any event, how we get there in this middling scenario is going to be volatile. In which case, we need to fasten our seat belts, it’s going to be a bumpy ride! Happy New Year to all!
Postscript:
In making my assessments and writing this outlook, it needs to be mentioned that a disruption in macroeconomic conditions — due to certain geopolitical events related to the Russia-Ukraine War, the Israel-Hamas War, and China-Taiwan tensions — and any extraordinary Fed actions that ensue have been discounted in my analysis due to the unpredictability of these events. In this regard, in March 2023, I had published an essay, “The CRINK in U.S. Foreign Policy,” warning of a long-term threat to the post-WWI international order from a developing China, Russia, Iran and North Korea axis. Interested readers are welcome to check it out. A second caveat regarding my 2024 outlook relates to our very own presidential election. Former President Trump’s candidacy and his likely convictions on various criminal charges could upend domestic tranquility and roil financial markets — any impact from this other very unpredictable situation has also been discounted in my 2024 outlook. Let us hope we are a sensible people and let us all pray for a peaceful year without having any domestic political chaos being added to an already volatile global scenario.
