RTX - Sam Kovacs' 2024 Market Prediction

2023-12-20 12:00:14 ET

Summary

• I have consistently predicted that the S&P 500 will go higher each year and expect the same for 2024.
• I believe that disruptive economic innovations benefit the whole and tend to flow toward capital holders, leading to a long-term upward trend in the S&P 500.
• Target range of 4,500 to 5,200 for the S&P 500 in 2024, with a target of 4,850 based on the expectation of a rate cut and election volatility.

Written by Sam Kovacs.

Introduction: Up or Down?

An exercise in futility, yet one everyone in our industry seems to take it very seriously.

Where will the S&P 500 ([[SPX]], [[SPY]]) be at the end of next year?

When I was asked prior to 2019, I said: Higher. I was right, the index increased by 28.8%.

When I was asked prior to 2020, I said: Higher. I was right, the index increased by 16%.

In 2021, same thing: stocks are going higher: the S&P 500 went up by 28%.

In 2022, I said: HIGHER. Got that wrong, the S&P 500 went down by 20%, although our dividend portfolios were positive.

For 2023, I of course said: HIGHER! So far, we're up 24%, so that seemed to be right, too.

So naturally, when you ask me where do I think stocks will go in 2024? I only have one answer I can offer: Higher.

Do I not see the recession looming? Did I not fear inflation? Did I not fear the Covid pandemic? Or am I simply an overly optimistic chap?

Officially, the S&P 500 was introduced in 1957. Since then it has experienced 48 positive years (49 if we assume 2023 will also be), and 18 negative years, or a 2.7/1 ratio.

While media and populism thrive on bad news and being alarmist, it turns out that for the most part, the world keeps making progress.

I never cease to be impressed. Sixteen years ago, the first Apple iPhone (AAPL) was launched, changing how we'd consumer media forever. Thirteen years ago, Instagram was launched and changed the way firms would market to consumers forever. Then crypto and NFTs came. They didn't change much, but they made some of us feel smart for a little while. And now, over a year ago, ChatGPT was released, changing how everyone searched and compiled information.

These are just a handful of disruptive innovations which have had important economic implications: they disrupt some people, but benefit the whole. Of course, the distribution of benefits is often skewed towards capital holders, but the equation remains true.

And since the benefits of disruptive economic innovation tend to flow towards capital holders, the value of the S&P 500 is skewed one way: up.

Or at least, if we look at the limited data set going back to the mid-50s, this has been the case. If we look back to the turn of this century, it still remains true, for now.

Over any given 15-year period, you'd only expect 4 of those years to be negative.

And while there have been many instances where positive years were interrupted by just a single negative year, there hasn't been a single time in the past century where negative years were interrupted by a single positive year.

Positive years, have tended to group together in clusters of 2-5 years.

So, it should come as no surprise that based on the numbers game alone that I will say the S&P 500 will go up in 2024.

But of course, you won't be content with knowing if the S&P 500 will go up, you'll want to know by how much.

By How Much?

The fact that most calendar years are up, is mostly just an extension that most stock market days are up, and distributed chaotically this will create boom and bust cycles that we witness.

There are still 10 days left in 2023, so of course the direction in those 10 days will have a big impact on how much the S&P 500 will increase by.

Because I have to give a target, I'll say that my S&P 500 target range is 4,500 to 5,200.

But since my view is that the market will likely be up, I'll set my target at 4,850, which is half way through both. Very arbitrary.

There is wiggle room in valuations, but the overall direction will come in two phases:

We'll have a first half of the year, or maybe until May, when the market will still be focused on rates, inflation, and conflict. The second half of the year, the news will all be about the election, and therefore conflict (both internal and external this time).

Let's walk through these points one by one, as they mesh quite nicely one into the next.

Rate Cycle: Hikes are over.

Of course, one thing that could throw a wrench in this beautiful bull market is a resumption of the Fed's rate hikes.

The Fed funds rate is at 5.33%.

I've been calling for the end of the rate hike cycle since half way through the year, when we were getting clear signs that inflation was coming down significantly.

There is no doubt in my mind that we're done.

Why?

Inflation, as we'll see in the next section, has backed off. We'll likely see it continue to come down in the upcoming months.

The Fed has a double mandate. Keep inflation below 2%, and reach full employment.

The unemployment rate is currently at 3.7% vs a 5.7% historical average rate.

The number of unemployed is on the lower end of the cycle, suggesting that we're as close to "full employment" as we could be.

Since there is no clear definition of full employment, it is safe to assume that the Fed has been willing to sacrifice a little employment to reach its inflation goal.

Hence the high rates this year. Now that rates are 2% higher than inflation, we've got positive real rates, and have had them for a few months now. This has provided sufficient pressure on inflation, for the time being.

Of course, the actual inflation numbers will have a big impact on the course.

Inflation: Too early to call victory?

I don't see the market having a strong breakdown this year, because we've just been a massive rate hike cycle, and it is appearing likely that we're getting as close to a soft landing as we could have reasonably expected.

The inflation rate is now at 3.1%. Core inflation, which excludes food and energy, is at 4%.

I never understood the exclusion, because as hard as I try, I can't exclude energy and food from my spending.

3% is actually a great amount of inflation to have in an economy.

It's enough of an incentive for businesses to invest and consumers to consume, without being a massive burden or drag. ( Of course, everyone is still feeling the bite from the +20% to +100% inflation we've witnessed since early 2022 on different expenditures).

The headline number continues to ease, and come down as the strain of higher cost of financing and a thrifty consumer brings upward pressures out of the equation, unless...

Oil: Back to the usual shenanigans.

Unless the price of oil goes up dramatically. For this to happen, some form of major development in conflicts between the U.S., China, Russia, and any number of the in-between players, would need to happen.

Can we write it off? No.

But in fact, I'm more worried that oil prices will break down, than I am that they will break upwards.

There is beginning to be increasing concern that OPEC+ will not be able to keep its ranks from cheating and pumping more oil than they said they would.

The cartel always faces a prisoners dilemma. If only one player cheats (a smaller one) then they can get away with it, but if everyone cheats, the outcome is lower oil prices and everyone suffers.

The Saudis can't afford much lower prices, as they are increasing their deficit each year amid massive infrastructure investments to diversify their economy. These investments need to be supported by oil revenues.

The Saudis are incentivized to push everyone to play ball, as they are the big volume player, and benefit more from higher prices than higher volumes.

The Russian war effort depends on income from oil, and because of constraints and sanctions from the West, the price of oil is more important than volume.

This is why we're seeing both Saudis and Russia roll over their voluntary cuts of oil production into 2024.

But for the first time in a few years, the OPEC+ cartel is not setting a group target for the production cuts, letting members decide on their voluntary cuts.

This sets up the market for cheats, especially when they witness the U.S. ( you know how much oversea oil rich countries love the U.S.) book record oil production numbers for the year.

So, absent a black swan, I'm not very concerned with the price of oil exploding out of control upwards. The downside risk is now greater than the upside risk.

Tying the three points back together.

So, since oil shouldn't throw a wrench in inflation numbers, the Fed won't need to increase its rates again, and the market will get excited leading up to a rate cut, likely in April-June, as the Fed will want to make sure inflation comes down and stays low for a while.

This is a set-up which is quite bullish for the first half of the year, which could see the S&P 500 break new highs and reach 5,200, before reversing back down on the back of a rate cut, maybe new conflict wild cards, and election volatility.

By the time the election comes around, the market could be bottoming at around 4,600 and be staging a new rally into the year end, which would give a fair 4,850 target.

The other option I see, is that we barely break a new ATH, get to 4,800 to 4,900 and have a sloppy year, which bottoms out in August once again around 4,500-4,600 and rally again into the election and beyond, once again providing 4,850 as a fair target.

Conclusion

As you can see in my forecast, I'm giving a number with a +/-7% return stated.

This is because it is important to understand that making pinpoint predictions is an exercise in futility, as there are so many inputs (I just discussed 3 of the main ones) which could shift sentiment positively or negatively.

Investors, of course, should always use these insights to:

• Invest optimistically (there will be growth)
• Invest opportunistically (there will be good opportunities to buy and sell)
• Invest safely (protect downside before seeking upside).

We just wrote an article including a list of 10 stocks for members of our Investing Group which looks at stocks which could do very well in the current environment.

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!

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