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2024 Market Expectations
As we start off 2024, the most common question we get is, “What is the market going to do this year?” It is important to note several things.
First, the experts rarely get it right. This isn’t because of some deficiency in intelligence or information. It is because the markets are not predictable. I didn’t read one expert predict that last year’s S&P 500 was going to be up so much and that it was going to be because of the 7 tech stocks, fondly referred to as the “magnificent seven,” while the rest of the market was up less than half of the weighted S&P 500.
Second, predictions are often all over the place, as they are this year. If you look at 2024, the year-end S&P 500 predictions from the top 8 investment banks range from 5,200 by Oppenheimer to a low of 4,200 by JP Morgan. The mean is in the 5,000 range. As for returns, the high is approximately a 7% return and the low prediction being approximately -12%.
Third and finally, 2024 is full of great opportunities but also possesses its share of land mines. Unfortunately, too often we let the land mines dominate our thinking and forget about the opportunities. There are no doubt concerns about the conflicts being waged in Ukraine and the Middle East, as well as other potential conflicts. We also must remind ourselves that this is nothing new. Not only that, but if you go back to 1990, only 2 wars/conflicts have been noted as a reason for the market to correct more than 10%, according to LPL research. That was back in 1990 during the Iraq invasion of Kuwait and the U.S. September 11, 2001, terrorist attacks. The last 7 conflicts didn’t even cause the markets to correct more than 5%. If this remains contained to the countries currently involved, I believe the markets will absorb the shock. If Russia expands its war or China invades Taiwan, then we will have to adjust the strategy.
Let’s discuss some of those positives though. The Federal Reserve Committee (Fed) is on track to hit the soft landing, meaning raise rates to stop inflation but not stop the economy. It’s too early to celebrate but the odds of a recession have dropped significantly. I still predict a minor recession in the second half of 2024 but, again, one the stock market can absorb without a major correction.
Analysts expect earnings to continue to grow at a rate of 11% in 2024, per LPL research. Valuations are stretched but just like the performance of the S&P 500 return in 2023 was heavily weighted by the magnificent 7, the P/E ratio is also impacted by those same names. Looking at valuations as a whole for the S&P 500 is no longer useful. One or two sectors might be overvalued versus their historical average but that doesn’t mean the entire market is overvalued. There are some opportunities in the market even though the S&P 500 is technically overvalued.
Will the 2024 Election Affect the Stock Market?
Another positive is that it is an election year. If anything, it is going to be a year of a ton of drama. However, did you know that since 1952, not only has the market never had a down year when an incumbent is running for reelection, the average return is 15.5%?
I am not a big fan of using past worthless statistics like this to measure any given year, but I do point it out to just remind people that this isn’t your or my first rodeo. We will make it through the upcoming drama. Moreover, there is no reason to expect it to have a significant impact on the market in 2024.
I would also like to remind everyone that there really is no statistically meaningful difference in stock market returns based on which party leads our country. For those thinking this year is somehow different, recall the great words from Sir Richard Templeton; “the four worst words in investing are ‘this time is different.’”
The most important and final point that I would like to make here is that the market is unpredictable. No one knows. I didn’t see any experts predicting the market to be up so much in 2023 due to just 7 stocks. For every year the experts predict it right, I would venture a guess they get it wrong 3 years. Going to cash due to a prediction is trying to time the market. Research proves that is a failed strategy long-term. That doesn’t mean one has to be a passive investor, just don’t overreact.
At Virtus Wealth Management, we believe bonds might finally be a value add to a portfolio. In the past 10 years, the total bond index has only had 2 years surpassing 6% in total return. I believe 2024 offers a nice risk versus reward of this being a year with 6% plus returns. Since stock market expectations are at best upper single digits, we can get a like-kind return without the historical risks.
I am often asked in these scenarios, “Why not go all bonds?” Recall, no one knows what the market is going to do in any given year. Like last year, the market may surprise significantly in 2024. Those big years are imperative to catch to get the long-term return in stocks most need.
Our strategy: Stay diversified, invested, and steady. Cautiously positive with a portfolio that is modestly underweight in stocks and over-weight in bonds for conservative and moderate models, but ready to act.