Goldilocks Meets Volatility: Decoding 1H2024 S&P 500 Predictions

Everyone in the financial industry is busy posting their 2024 market forecasts. In fact, even though we have yet to print year end 2023 statistics on equity markets and see how far off they were for 2023. most strategists have already done it,

I guess given how poorly most of these strategist outlooks proved in 2023, most forecasters don’t want people focusing on their bad calls.  Maybe these strategists are thinking these kinds of things.  “We called for a recession in the 1h2023, or was it the 2h2023”?  or a market “crash, for October, “1987 style”.  Oops, neither happened, don’t bring those forecasts up.  Or others are probably thinking, we were off by 1000 S&P500 points? Calling for S&P 500 3000 and investors to “gorge” at that level or calling for months for at least a retest of October 2022 3500-3600 levels as stocks rallied in the 1q2023!  Of course, looking back, none of those events happened. Move along, nothing to see here folks!  Maybe, if we get our 2024 outlook up in November, well maybe people will forget our bad 2023 calls.

The investment team at OHFG likes to release 6-month outlooks as a lot can change in 6 months.  However, most of the time, at the end of these pieces we drop in some longer-term thoughts looking out a year to 15 months. Our second half outlook for 2023 had a year end target on the S&P 500 of between 4730-4800, near ATH’s. It was released back in July and called for “down then up”. Here’s the link to that content.

With so much content and data available to produce these outlook pieces, I’m going to keep it slow.  I’m releasing a small part each week. Last week I gave you S&P 500 = 5000, “Inconceivable”, no it’s just more of the Old Normal as Savita Subramaniam, the head of equities and quantitative strategies at BOA/Merrill Lynch Securities posted her 2024 outlook to much financial press fanfare.  Remember viewers that’s her year end 2024 forecast, we’ve had that number lightly penciled in for the first half of 2024 for over 12 months.

Here’s the link to our video last week:

This week I want to bring investors back down to earth,  With the cash S&P 500 nearing 4600, and the financial media out hyping the 20% year to date return for the S&P 500 and this index hitting new “highs for 2023”, I am sure the sense of FOMO, fear of missing out, is starting to set in for many investors or strategists who incorrectly forecast a recession in 2023, a stock market crash in October, or who just plainly missed the strong November rally off a very normal summer correction.

I remind investors, S&P 500 at 4600, while strong year to date, this also means that the overall S&P500 has gone nowhere for almost 2 years, since October 2021. While our team remains optimistic for the next 4 to 6 months, we do not expect it to be a smooth ride through the 1st half of 2024.  This week’s title Is an ode to one of my favorite bands from the 80’s, REM, from my home state of Georgia, my title, given the many now optimistic equity strategist calls coming for 2024, is 1h2024, Goldilocks meets volatility, S&P 500 >5000, “Can’t get there from here”.

This video will focus almost entirely on volatility, which is the first metric I use to triangulate potential S&P 500 targets for forward months. That’s the metric of tradeable volatility.  Volatility futures, not the spot Vix Index.  Frequent followers of my content are probably getting bored of me discussing this one, but it’s pretty much where I start every one of my “market forecasts”.  Why? Because portfolio management is about risk versus return, reward.  And until financial academics come up with a better measurement for risk than volatility or standard deviation in returns, this is the one I use.

Remember investors that while many strategists on TV discuss the VIX index, it is not tradeable.  It is purely a math equation.  However, volatility futures are tradeable.  And those who trade them well for a living, are some of the smartest math minds in the financial world.  They are more or less, insurance salesmen, price forward risk in real time.  And the best insurance salesmen are those who sell you insurance at the highest price they can, while eventually letting the insurance expire worthless and unneeded more often than not.

The volatility timing and forecasting tool helped our investment team in late 2020, when other strategists were preaching doom for equity investors due to Covid lockdowns. The title for our first half 2021 outlook was looking very bullishly for stock markets, that title was “You ain’t seen nothing yet”, while our 2nd half outlook for 2021, titled “Let the good times roll” was also very positive for equities. By the end of 2021 we went on to warn our followers of the impending risks for the markets for the 1h2022 when we published our 1h2022 outlook titled, “Curb your Enthusiasm”.

I’ve discussed this tool in more detail in prior videos and podcast releases over the last 4 years. Today, I’m pretty confident in saying that levels much above 5000 on cash S&P 500 won’t be achieved in the first half of 2024, and if they are, they will not be sustained for long. Why?

While spot volatility, the VIX index, is not traded, it doesn’t mean that it isn’t a useful number in some manner.  Many academic studies have proven that it, by itself, is not predictive in its own right.  However, short of the one year that many investors long for again, 2017, which was the Trump tax cut anomaly, history has said that the spot VIX does not calculate much below a level of 12 for long.  Here is a multi-year chart of spot volatility, the Vix Index.

multi-year chart of spot volatility, the Vix Index

Using this metric, prior cycles of Federal reserve interest rates moves, yield curves, and investor sentiment, one can triangulate forward “potential” cash S&P 500 levels under both “calm” and “distressed” or highly volatile market conditions.

In advance of the rally for 2023, our investment team used our knowledge of volatility combined with our research into 1- Presidential election cycles, discussing how the 4th quarter of the 2nd year through the first half of the fourth year was the sweet spot for investment returns historically.  2-  Federal Reserve interest rate hiking cycles and how stocks have performed during each stage of raise, pause, and lowering short term interest rates that they control and 3 – investor sentiment, hedge fund and retail investor positioning, and stock market breadth cycles and how they can create positive expected return profiles for the markets when investors are positioned extremely bearishly as they were as the end of 2022 and then flip positive over the coming 12 to 15 months.

For now, our 1st half outlook for 2024 remains as it has been alluded to for almost a year. The first quarter of 2024 should usher in a year of heightened volatility.  This volatility should present itself almost immediately in the first few weeks of the year and throughout the first half of 2024, that’s the bad news.  The good news, new ATH’s in the S&P 500 are likely in the first half, most likely in late 1qt quarter and the S&P 500 can near 5000.   That level is not “inconceivable” at all, just more of the “old normal” returning to the equity markets for 2024.

However, exceeding, and sustaining levels above 5000 on the cash S&P 500 for the first half of 2024?  Well investors, sorry to say, (I’d sing it but I would loose subscribers to this channel), “I can’t get there from here”. This is why our investment team believes that more active and tactical investing and trading strategies, versus buy and hold ones, will likely be a better way to invest for a number of years.  Stay tuned for more on that topic in the weeks and months ahead.

Oak Harvest Financial Group manages broadly diversified equity portfolios that balance risk and reward for our clients. The investment tools our advisors and financial planners use are usually a combination of markets based and insurance-based tools to meet your retirement goals.

Our in-house investment team is busy working on new tools for our advisors and retirement planning teams to use in the future. Stay tuned. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.

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