Transcript summarized below:
2023 was a banger year for the stock market, though many are concerned a recession is on the horizon. What should you expect from the markets in 2024? Stick around and let's get into it.
Welcome back and happy 2024! I am your host as always Eric Presogna, CPA, CFP here to help you maximize income, reduces taxes and invest smarter.
Brief recap of 2023. S&P up big. Bonds did what they're supposed to do. Bitcoin ripped. Small caps surged late in the 4th quarter. International lagged the U.S. but still turned in a solid double-digit return.
What's on the horizon for 2024?
That's the million dollar question, right?
Everyone wants to know what the market will do tomorrow so they can sell the losers and lever up on the winners.
Best-selling author and management guru Peter Drucker once said: "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window."
For me, it's like doing all of those things while wearing a blindfold.
Successfully trying to predict future market returns is a fool's errand and acts better as entertainment than sound financial advice.
In this video, I want to stick to the facts about what we know for reasonable certainty will occur in 2024, i.e. a Presidential election, and what past data tells us about what we might expect to see in the future.
And for fun, maybe I'll sprinkle in a few of my predictions here and there because hey, I'm a fun guy despite what my wife says.
1. Election Year
I'm not going to predict who will win the Presidency but rest assured, it's almost certain that a new President will be elected this year.
How have the markets performed during an election year? Let's look at the data from 1928 - 2016.
On average, the S&P 500 has returned 11.28% in all election years. When a Republican was elected, the average return was 15.3% compared to a Democratic Presidency which garnered an average 7.6% return.
Don't kill the messenger. I'm just reporting data here!
The worst election year for stocks was when Obama was elected in 2008 and the S&P dropped 37% when the housing bubble burst.
Outside of 2008, there have only been three election years where the market declined: 2000, 1940 and 1932. To put it another way, election years have yielded positive market returns 83% of the time.
The odds are in our favor that 2024 will be another favorable year for stocks.
However, if we look at the election years where the market declined, you can see there's more to the story than just a new President.
2008 - Great Financial Crisis
2000 - Internet bubble
1940 - World War 2
1932 - Great Depression
I remain cautiously optimistic about 2024 and, gun to my head, would predict we see stocks close higher by 12/31/24.
2. Interest Rate Cuts
Inflation began spiking early in 2021 and ended that year with an annualized rate of 7%, a nearly 500% increase from the prior year. It wasn't until March of 2022 that the Fed started hiking rates.
If they moved slow in the past with hikes, my bet is they move slow with cuts.
Many economists are expecting Jerome Powell to cut interest rates three times in 2024 starting sometime in the 2nd quarter.
I don't think it's that simple. As J.P. Morgan noted in their Market Outlook for 2024: "some market declines and volatility would need to take place first during 2024 before easing of monetary conditions and a more sustainable rally." In other words, it's going to be difficult for the Fed to cut rates without good reason.
My prediction is less cuts than what's expected and the first of said cuts to occur later in the year than anticipated.
3. More Cash Going to Work, But Not as Much as Experts Think
This one coincides with my last point on interest rates.
IF we see rate cuts this year, that will likely reverse some of the $1.7 trillion of flows into money market accounts last year and entice investors back into the market.
I doubt this happens all at once, especially if the timing and volume of rate cuts falls short of consensus.
It comes down to the risk-free rate investors are content with. It's hard to argue with sitting in cash and collecting 5%. But what happens if that yield drops to 4%? 3%?
At some point, the yield won't be attractive enough and depositors seeking 5%+ returns will be forced into riskier assets.
In addition to the high percentage of positive returns during an election year, lower deposit rates in another catalyst for supporting stock prices higher.
4. Equal-Weight > Market-Cap Weight
In the early 1980's IBM and AT&T were the two largest companies in the world. By 1994, IBM dropped out of the top 10 and General Electric took over the reins. Just 15 years later, Exxon Mobile and Apple were the two most valuable companies and today, GE barely cracks the top 100.
The Magnificent 7, or Mag 7 as it's commonly referred to include seven behemoth tech companies that seem invincible: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla.
Trust me, they're not.
It may not be this year or the next, or even 5 years from now. But sooner or later, the biggest and most powerful companies in the world will be replaced by new incumbents. Could be a new A.I. stock that's flying under the radar. An entirely new sector could be created by a small basket of companies that are growing rapidly and changing the world for the better.
Why is this important?
Remember, if you own the S&P 500, you're automatically overweight these seven companies that comprise nearly 30% of the market.
I don't think A.I. is going away and will likely continue to be the chief catalyst driving stocks higher in 2024. However, I believe it's probable the overly-concentrated tech-heavy S&P 500 could lag the equal-weight index (similar to the S&P 500 but weighted evenly by the number of companies in the index as opposed to their size) on a risk-adjusted basis.
5. A New Asset Class is Born
As of this writing, the SEC has officially approved the launch of spot bitcoin ETFs.
This monumental decision has been highly-debated and closely watched for years.
Now, retail investors both large and small will have much easier access to the king of cryptocurrencies.
I don't know if this is a good thing or bad.
What I am certain of is that big institutions like BlackRock, Fidelity and Wisdom Tree will be marketing and pushing their new bitcoin ETF products harder than ever.
I wouldn't be surprised if some of these institutions begin adding cryptocurrency to their model portfolios in 2024 with a small, say 0 - 5% weighting in bitcoin to start. As more banks follow suit and begin implementing their own bitcoin ETFs and allocation readjustments, it's likely we'll see a new asset class for advisors to consider when investing for their clients.
My not-so-hot take is iShares will win the bitcoin ETF war with the highest AUM and lowest expense ratio before year-end.
6. A WTF Event Plunges the U.S. Into a Recession
Author Carl Richards once said: "Risk is what's left over after you've thought of everything."
An alien invasion.
World War 3.
A wave of cyber-attacks takes down the banking system.
What's likely to wreak havoc on the markets won't be something we see coming like a resurgence in inflation, slowing economic growth or a dunce cap for a President. The real catalyst will be something far more unexpected.
I'd be remiss if I didn't at least mention the possibility of a black swan event.
What are your predictions for 2024? Do you think we'll see another year of double-digit returns in the market? Please respond in the comments below or shoot me an email with your takes on 2024.
Thanks as always for watching our videos. If you're interested in staying up to date with our market and financial commentary, please subscribe to our blog at oneupfinancial.com/blog or follow us on LinkedIn and Facebook.
Thanks again, and we'll see ya in the next one.