META - S&P 500 In 2024: Much Ado (Volatility) About Nothing (Return)

2023-12-21 11:59:34 ET

Summary

• The S&P 500 Index, Nasdaq 100-Index, and Dow Jones Industrial Average all have 7-week winning streaks.
• Long-dated US Treasury bills enter bull market, while money flows into stocks and out of US Treasuries.
• Retail traders are highly confident, but history suggests modest gains until sentiment resets.
• We expect volatility to increase in 2024, but that won't have a major (negative) effect of stocks. The downside is limited to about only 8%.
• Whether we see a move down or not, we see no reason for the SPX to stop its march higher because 5000 by the end of 2024 would be just as reasonable as 4700-4800 by the end of 2023 is.

[Another] Week of Records

The S&P 500 Index ( SPX , SP500 ) is up 7 straight weeks - l ongest weekly win streak since September 2017.

On a weekly close basis, the index is now only ~1% below its all-time high.

Also up for 7 straight weeks, the Nasdaq 100-Index ( NDX ) is already at an ATH on a closing price basis.

Same 7-winning streak applies for the Dow Jones Industrial Average ( DJI , DJIA ) - the longest winning streak since February 2019.

Basically, everything is going up these days.

Long-dated US Treasuries ("USTs") have officially entered a bull market after TLT surged by more than 20% from the 16-year low it hit on October 23rd.

Even the US Treasury 30-Year Yield (US30Y) is now trading at 4%.

Moreover, it dropped below its 200-DMA by the largest spread in 2 years.

Money Flows

Another week of inflow for stocks, while US Treasuries suffer from outflows.

Largest 8-week inflow to equities since March 2022.

Third biggest weekly inflow into fund stocks this year.

Largest 2-week outflow from USTs since June 2020.

An "All-In" Mentality, "Overbought" Reality

Retail traders are "all-in" again, with the (so called) "Dumb Money Confidence" jumping to the 3rd-highest reading in 25 years.

Back in 2021, this was no problem whatsoever, however, other than that, very high confidence typically precedes modest gains at best until sentiment resets.

Wherever you're looking - NYSE, NASDAQ, or S&P 500 - the number of stocks breaking out (to 52-week highs) is at the best level in nearly two years.

Nearly 47% of SPX stocks are in overbought [RSI>70] territory now - the highest level in 32 years.

SPX RSI has jumped above 80 for the first time in more than 3 years and has now reached its most overbought level since September 2020.

History Suggests to Stay Put

Over the last 7 straight up weeks, SPX gained 14.6%.

Since 1950, there have been 30 streaks of 7+ weekly winning streaks for SPX.

Looking at 20 out of these 30 streaks with minimum gains of 7%, here are the forward results.

Note that 1%+ moves (up or down) over the next 4 weeks were 14-1 in favor of the UP.

SPX experienced a gain of 14.5%+ over 34 days (or less) only 4 times since the GFC.

History suggests markets produce significantly greater gains in the coming years and stocks always traded higher 12 and 24 months later.

Sooo.... 4800 by year-end?

Based on seasonality, this is where the SPX "supposes" to end 2023 at.

Rate Cuts: Good or Bad for Stocks?

BofA forecasts 152 global rate cuts in 2024, first year since 2020 cuts to outpace rate hikes.

Thing is, the Fed has started easing when core CPI was higher than the Unemployment rate only 5 times before

No wonder the Fed officials are quite confused themselves, sending contradicting messages.

• Dec 1, Powell: It’s premature to talk about easing.
• Dec 13, Powell: We’re talking about the timing of easing
• Dec 15, Williams: We aren’t really talking about it
• Today (in the FT ), Mester: Markets a ‘bit ahead’ of central bank on rate cuts.

132bps of cuts are now priced in for next year, after we hit 150+ last week.

What We (Still) Like

1) Short-Term Income Plays

In the past 5 cycles since 1990, outflows from money market funds only began (on average) 12 months after the first rate cut.

2) Small-caps

Remember: Small-caps have outperformed after the first Fed cut.

3) Large-caps vs Big Tech

Equal-weight S&P 500 ( RSP ) is showing signs of life versus SPDR® S&P 500 ETF Trust ( SPY ).

The former tends to outperform, especially when concentration in the top 5 gets lofty.

The largest 7 companies in the SPX currently account for nearly 30% of the index - the highest combined share in at least the last 43 years!

Warning Signs We Must be Mindful of

U.S. inflation soared to 9% due to the ongoing spike in money supply (M2) since the Covid crisis.

Inflation has always been a monetary phenomenon.

Moreover, as the below chart shows, CPI follows M2 with a lag.

Given the current Y/Y contraction in M2, U.S. CPI is likely to hit Fed's target in 2024.

That's good news, right?

Unfortunately, money supply contractions point to deteriorating economic growth, and they always hurt the economy.

SPX performance post persistent yield curve inversion and Fed Pivot (initial rate cut) suggest that Bulls must be betting on "this time is different."

During prior cycles (except 1973/74), the Fed delivered the first-rate cut when the Leading Economic Indicators ("LEIs") were a lot higher than they're now.

Whenever the Fed waited until the LEIs were near zero or negative (as it's now), a recession landed every single time.

While it's always a possibility, "This time is different" isn't the most recommended approach because, well, in most cases "this time" is no different than similar historical events/patterns.

Returns-wise, we're happy for 2024 (or this week, for that matter) to replicate 2023 (previous week). However, strategy-wise, we would feel quite unsafe - and frankly irresponsible - if we anticipated next year would replicate this year.

We have already taken most of the actions we want/ed to, and over the next month or so we will complete the transition from 2023 into 2024.

S&P 500 in 2024

We see:

1) Higher volatility.

Note the inverse correlation between rates and volatility.

Lower Fed Funds Rate and Higher VIX are going hand-in-hand.

2) 20+ multiples become the norm.

Before the GFC, SPX multiples tended to be sub-20.

Of course, there were abnormal periods, some of those running over a few years (e.g., dot-com 1990s), but during normal times P/E ratios used to be lower than 20.

Then came the GFC and changed the way investors operate. The focus shifted from valuations to (market) dominance, cash flows, "mojo" and edge - the things that stocks like the MAG-7 or MegaCap-8 have plenty from.

Multiples greater than 20, 30, even 40 are now "just fine" as long as the other "ingredients" are part of the package too.

• By the end of 2024, SPX forward 12-month (i.e., 2025) EPS: $240-$260 (midpoint $250)
• Forward 12-month P/E: 20x
• 20 X 250 = 5000.

3) Leg down followed by a bigger leg up.

Playbook:

1. Reaching the previous all-time high either before year-end 2023 or during January 2024.
2. Leg down = Downside to 4400
3. Leg up = Upside to 5000.

Bottom line: End of 2024 target: 5000

Wishing you and yours a Merry Christmas and a Happy New Year!

Editor's Note : This article was submitted as part of Seeking Alpha's 2024 Market Prediction competition , which runs through December 20. With cash prizes, this competition -- open to all contributors -- is one you don't want to miss. If you are interested in becoming a contributor and taking part in the competition, click here to find out more and submit your article today!

For further details see:

S&P 500 In 2024: Much Ado (Volatility) About Nothing (Return)