2024 Stock Market Outlook: Volatility, Goldilocks, and Presidential Cycles

Okay, investors, I had emergency retinal surgery last week, but I wanted to keep rolling out our 2024 market outlook because it is the end of the year. People keep asking, even though we’ve alluded to it for almost 12 months now.

Last week we released the first part. It’s Goldilocks meets volatility 2024. We do have a price objective for the first half of 5000. That really hasn’t changed. We’ve talked about that for six to 12 months because we currently are following the path of 1999 through 2000, both from the Fed, from inflation, from interest rates, most everything we see going on. That’s continuing right now. Last week I was out, but I was following stocks for our clients and prospects. A lot of the moves we were seeing, whether it’s Bitcoin, whether it’s semiconductors, still mirroring the 1999 scenario, which that’s a good thing because that means the market can get near all-time highs here into the end of the year, as we suggested over the last six or 12 months.

However, it doesn’t leave a lot of upside for 2024 in percentage terms. It would say that volatility is going to return pretty substantially in the first quarter of next year. That was our release last week for our first part. This week I wanted to cover the Goldilocks part that people talk about. If you turn on the financial news networks, you’ll hear strategists talking about it’s a Goldilocks economy, meaning it’s not too hot, not too cold. It’s just right, just like in the fairy tale. The thumbnail last week was an ode to that. Corinne, I want to give a shout out to, came up with a great clip with me over Goldilocks with some paddles to shock her because of the volatility we expect next year.

What do economists and strategists mean by Goldilocks? If you followed me for the last couple of years, I don’t like nebulous terms. I like data. We’ve shown this in the past. The data says Goldilocks is an economy where GDP grows between 3% and 5%. It’s pretty precise. It’s not growing too fast. It’s not growing too slow. It’s comprised of both real growth rate and inflation, because when you add the two together, that’s what you get for GDP, of between 1.5% and 2.5% of real growth and 1.5% to 2.5% of inflation. On the low end, 1.5 plus 1.5 equals 3. On the high end, 2.5 plus 2.5 equals 5. That’s the sweet spot. It’s when stocks can actually enjoy their generally biggest and most consistent gains, because companies can look at their business and say, hey, I know within a reasonable doubt what my growth is going to be next year, what inflation is going to be, what my costs are going to be, and I can invest.

Inflation is really high, like it was two years ago. I think it was running about 9% in June of 2021. Companies have a hard time figuring out what their costs are going to be. When things are deflating and inflation is coming down really quickly, companies get scared because they’re not really sure if that’s just pricing falling off a cliff or if it’s demand. The sweet spot, the Goldilocks spot, is 3% to 5% GDP growth, and it’s a combination of inflation and real growth. That’s a good thing, right? That’s more likely where we’re going to be in the first half of next year. It’s also the Goldilocks part of the economic cycle and stock market cycle, because we’ve talked about this before, the presidential election cycle. Whether you like it or not, whether you’re Democrat or Republican, it hasn’t historically mattered who was sitting in office of the presidency for stock returns, particularly during the sweet spot of the presidential cycle, which we talked about in advance was the fourth quarter of the second year presidential term through the very middle half of the fourth year.

That just so happens to have been October of 2022 through somewhere between April and June of next year, 2024. If you looked historically, whether it’s a Democrat or Republican president, the returns you get in the stock market are the best during those quarters. Why? Because the president is looking to get reelected. He’s stimulating the economy as much as they can to try to get the economy going. Most of those measures, whether right now I guess they’re the Inflation Reduction Act, which we’ve discussed in the past, not really well named. A lot of those measures were hitting in 2023 in the second half, and they’ll be hitting in the first half of 2024, but they start to get calendarized in the second half of 2024. All the economic benefit is going on right now and will continue through the first half of next year. However, it starts to fall off because as you get closer and closer to the election, the sitting president gets less and less things done, which a lot of times is a good thing. It creates a slowdown in economic growth, creates an increase in uncertainty. Stock market generally doesn’t perform particularly well into the election.

That’s what we’re looking for as well next year. Our outlooks are done in six month segments. Right now, we’re sticking with the first half. We continue to see, a strong end of the year. We talked about it into the October lows that seasonality should kick in. Santa Claus rally starts at the end of October. It doesn’t start right around Christmas. If you wait till Christmas, you’re going to be too late. Extends almost right into the end of the year. What we should look for next year is some decent returns in the first half. By decent, foreclosing 2023 at or near all-time highs, which would be, say, 4750 to 4800. 5000, it sounds like a huge number out there, and the TV personalities are making it out to be like this grandiose number.

From 4800, 5000 is about 5%, 5.5% to 7.5%. If there’s lots of volatility to get there when you’re comparing it against a two-year treasury or a one-year treasury, which is your alternative short-term, it’s about the same return. Longer-term investors should be sticking with their plans that they sat down with their financial advisor. Don’t make big changes. People who are looking at shorter-term returns, there are tools out there that are more tactical in nature that look like will probably be of a lot of use next year because we do expect higher volatility. The buy-and-hold strategy, while long time frames is very beneficial from a tax perspective and a cost perspective. Don’t think it’s going to be highly effective next year in that there should be a lot of volatility coming our way in the first half.

Probably right out of the gate is some people try to take some gains that they built up over the last year or two. If the market’s near all-time highs, they’re going to like, “Okay, it’s 2024. I don’t have to pay taxes in 2023. If I sell early in the year, I don’t have to really pay taxes until the end of the year on that stuff.” Expect volatility to pick up at the beginning of the year. Provide a good buying opportunity by mid-first quarter. We expect earnings to be reasonable in the first quarter of next year. One of the things I will not talk about is trying to come up with a target on the S&P 500 based on valuation. Valuation, as we’ve discussed and shown, is a horrible market timing tool over months, quarters, and even one or two years.

Over 10, 20 years, it’s a fabulous tool. You want to invest as much money as you can during recessions, when things look bad, when valuations are low, and then not touch it again and wait for the economy to pick up and compound your money. Over short time periods, if you think about these strategists on the sell side, they have a number on the S&P 500, I think, for 2024. The number I’ve heard is $250 in earnings. Okay? $250 in earnings. What multiple do I put on that? Do I put a 20 multiple on that? If I put 20 multiple on that, it’s 5000, right in line with what we have.

If you go by the multiple rule of if you take a 10-year treasury, say it’s yielding 4% or maybe it’s not quite there yet, but say it gets to 4% next year. You take the 4% yield and you flip it, you do the ratio, that would be 25. Some people have this rough estimate that that’s the multiple you can pay on the S&P 500. 25 times 250, that’s a number well in excess of 5000. I don’t like that because if you’re off on the multiple by one point, that’s 250 S&P points, which at this level right now, that’s 5%. You can miss your return by 100%, thereabout. a return of 5% to 10%, that’s an error of 100% and still be correct. We try to be as precise as we can, knowing that we’ll more often than not be wrong. I like to know I was wrong for these reasons, as opposed to just making this massive spread out there and saying, “Oh, we got part of it right.” That’s what we’re seeing here in the first half of 2024. The Goldilocks economy, yes, it’s there from a GDP standpoint, from an employment standpoint, from inflation coming down. Fantastic. However, we do expect higher volatility in the first half to negate some of that Goldilocks outlook.

We’ll be looking for opportunities for our clients mid-first quarter, a little later in the first quarter to do some additional buying if things play out the way we are seeing it, even with one eye open. From the whole team here at Oak Harvest, from the investment team, from Troy, Jessica, James, everyone, myself included, have a blessed weekend.

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