Small-Caps Have Historically Flourished Ahead of Christmas For decades we have been tracking the market’s performance around holidays in the annual Stock Trader’s Almanac. In the 57th edition for 2024, data for DJIA, S&P 500, NASDAQ and Russell 2000 can be found on page 100. Of the eight holidays tracked, Christmas has been one of the most consistently bullish with respectable average gains occurring from 3 days before to the day before. Since 1988, the second day before Christmas, December 21 this year, has been most bullish over the past 35 years with greatest average gains and the highest frequency of advances. Small caps measured by Russell 2000 have enjoyed the most consistent strength on all three days. Volatility also tends to be subdued ahead of Christmas with significant declines occurring only in 2018, 2008, 2001 and 2000. 2018 was the only year to see declines on all three days by all four indexes.
Four More Reasons ’24 Should Be a Good One for the Bulls “Investing is like dieting. It is simple, but not easy.” Warren Buffett, Chairperson at Berkshire Hathaway It was a year ago this week that we moved to overweight equities and we’ve been there ever since. Obviously, this wasn’t a very popular call, as nearly everyone else on Wall Street was expecting a recession and the continuation of the bear market from ’22. Anytime you go against the crowd it will ruffle feathers, but we saw many reasons to do it then and we still see many reasons to expect continued good times in ’24. We wrote Why We Think The Bull Market Should Continue In 2024 on November 9 (nearly six weeks ago) and all stocks have done since the publication of that blog is go up EVERY … SINGLE … WEEK. In fact, the S&P 500 is up a very impressive seven weeks in a row currently, for the longest weekly win streak since eight in a row about six years ago. You might think that long weekly win streaks like this are bearish, but that isn’t true. In fact, you tend to see streaks like this in bull markets and continued strong price action is normal. Looking at all the seven week win streaks since 1950 showed that stocks were higher a year later 25 out of 29 times, or more than 86% of the time. That’s the first recent signal we’ve seen that suggests the next 12 months could provide another good year for the bulls. Second, we’ve seen huge jumps in breadth, otherwise known as participation. For most of this year we heard the same bears on TV tell us (over and over) that only seven stocks were going up. We disagreed with this analysis the whole time, as many stocks were indeed going higher, but the blast of buying pressure we’ve seen the past few weeks further confirms there are way more than only seven stocks supporting markets now. Last week saw more than 90% of the stocks in the S&P 500 above their 50-day moving average. This might mean we are near-term overbought, but you also tend to see this kind of strength at the beginning of bullish moves. Going back the past 20 years, previous times we saw such strong participation, the S&P 500 was higher a year later 14 out of 15 times and up 16.1% on average. Yet another clue stocks could be in a for a nice year in ’24. Another rare, yet potentially bullish, signal is our third reason to expect higher prices in ’24. Recently more than 40% of the components in the S&P 500 saw an RSI of more than 70. We will keep this fairly simple, but the RSI (or relative strength Index) is an overbought/oversold indicator where the general guideline is above 70 is overbought and below 30 is oversold. You can read more about the RSI from our friends at Investopedia here. The bottom line is when you see a large spike in the number of stocks in the S&P 500 that are overbought, it is very bullish. Thanks to data from Ned Davis Research we found there were only four other times since 1972 (as far back as NDR data goes) that also had above 40% of stocks at overbought levels. The average return a year later was an extremely impressive 25.7% and higher all four times. In fact, the worst return a year later was ‘only’ 17.6% after the signal in February 1991. I don’t know about you, but I could live with a 17% gain in 2024. The last reason to be bullish in ’24 — when stocks have dropped more than 10% (like 2022), then jumped more than 10% (like this year), that following year tended to be quite solid, up six out of six times with an 11.7% gain on average, which would likely make most bulls smile in ’24. As Uncle Warren told us in the quote at the top, investing can be very tough. There will always be reasons to worry and reasons to sell. Yet, some of the very best investors in history are those who simply used the scary times to add when others are selling. Sure, it isn’t always that simple, but look at 2023. As we laid out all year, the overwhelming evidence suggested stocks would go higher, and they sure have. That’s why we invest based on facts, not feelings.
Official Santa Claus Rally Starts Tomorrow! It is not a trading strategy; it is an indicator. To wit: “If Santa Claus should fail to call, bears may come to Broad and Wall.” Yesterday’s selloff was a great setup. Just what the Santa Claus Rally needed. The Street has been buzzing about the Santa Claus Rally for three months now. Most still get it wrong. It’s not the yearend rally, the Q4 rally that runs from Halloween through January. Yes, November, December and January are the best three months of the year, but they are not the Santa Claus Rally. Santa Claus Rally was devised by Yale Hirsch in 1972 and published in the 1973 Stock Trader’s Almanac. The “Santa Claus Rally” is the last 5 trading days of the year plus the first 2 of New Year. This year it begins on the open on December 22 and lasts until the second trading day of 2024, January 3. Average S&P 500 gains over this seven trading-day range since 1969 are a respectable 1.3%. It is not a trading strategy; it is an indicator. Failure to have a Santa Claus Rally tends to precede bear markets or times when stocks could be purchased at lower prices later in the year. Down SCRs were followed by flat years in 1994, 2005 and 2015, two nasty bear markets in 2000 and 2008 and a mild bear that ended in February 2016. As Yale Hirsch’s now famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.” Stay tuned for more on the rest of my January Indicator Trifecta and sign up for my newsletter to get my official readings and analysis. And get the 2024 Stock Trader’s Almanac as a free bonus. https://stocktradersalmanac.com/LandingPages/get-Almanac-for-free.aspx
Here Comes the Santa Claus Rally “If Santa should fail to call, bears may come to Broad and Wall.” —Yale Hirsh One of the little-known facts about the Santa Claus Rally (SCR) is that it isn’t the entire month of December; it’s actually only seven days. Discovered in 1972 by Yale Hirsch, creator of the Stock Trader’s Almanac (carried on now by his son Jeff Hirsch), the real SCR is the final five trading days of the year and first two trading days of the following year. In other words, the official SCR is set to begin tomorrow, Friday, December 22, 2023. Historically, it turns out these seven days indeed have been quite jolly, as no seven-day combo is more likely to be higher (up 79.5% of the time), and only two combos have a better average return for the S&P 500 than the 1.32% average return during the official Santa Claus Rally period. Here’s a chart we shared at the start of the month, showing that the latter half of December is when most of the seasonally strong gains occur. Of course, this year is anything but normal, with huge gains the first part of the month. These seven days tend to be in the green, so that is expected. But fun trivia stat, the SCR has been higher the past seven years and hasn’t been higher eight years in a row since the ‘70s. The all-time record was an incredible 10-year winning streak in the ‘50s and ‘60s. Here we show all the SCR periods since the tech bubble and how the S&P 500 does after each. The bottom line is that what really matters to investors is when Santa doesn’t come, as Mr. Hirsch noted in the quote at the start of this blog. Here we show some recent times investors were given coal during these seven days, and the results after aren’t very good at all. The past five times (going back 30 years) that the SCR was negative saw January down as well. Notably, there was no SCR in 2000 and 2008, not the best times for investors, and potentially some major warnings that something wasn’t right. Lastly, the full year was negative in 1994 and 2015 after no Santa. We like to say in the Carson Investment Research team that hope isn’t a strategy, but I’m hoping for some green during the SCR! Finally, the average gains each year for the S&P 500 is 9.1% and the index is higher 71.2% of the time. But when there is an SCR, those numbers jump to 10.2% and 72.4%, falling to only 5.0% and 66.7% when there is no Santa. Sure, this is only one indicator, and we suggest following many more indicators to base your investment decisions, but this is clearly something we wouldn’t ignore either. The bottom line is stocks are at or near all-time highs, we’ve been quite vocal about why stocks would do well this year, and we don’t see any major reasons not to expect Santa to come once again in 2023.
NASDAQ & Russell 2000 Up 71.4% Of Time Day After Christmas Click here to view table full size… Santa Claus Rally starts today. The Santa Claus Rally was discovered and named by Yale Hirsch in 1972 and published in our 1973 Stock Trader’s Almanacas the last five trading days of the year and the first two trading days of the New Year. This short, sweet rally is usually good for about 1.3% on the S&P 500, but the real significance of the SCR is as an indicator. It is our first seasonal indicator of the year ahead. Years when there was no Santa Claus Rally tended to precede bear markets or times when stocks hit significantly lower prices later in the year. As Yale’s famous line states (2024 Almanac page 118): “If Santa Claus Should Fail To Call, Bears May Come to Broad and Wall.” NASDAQ and Russell 2000 have logged the greatest frequency and magnitude of gains on the day after Christmas. Since 1988, NASDAQ has advanced 73.5% of the time with an average move of +0.37%. R2K has also advanced 71.4% of the time with an average advance of +0.37%. DJIA and S&P 500 have slightly softer records, but bullish, nonetheless. Two days after Christmas, the market is less bullish with NASDAQ down more often than up. Three days after Christmas R2K small caps take the lead advancing 65.7% of the time with an average gain of +0.52%. Looking further out, from 1950-1985 last 5 trading days of the year S&P 500 up 34 of 36 years, average gain 1.24%. 1986-2022 up 20 of 37, average gain 0.40%.
Top Charts of 2023 What a year it has been! The economy surprised, the consumer remained resilient, stocks soared to new highs, and even bonds are looking at a nice year thanks to a late innings rally. Just like everyone called it As you are reading this I’m hopefully enjoying a nice break the final week of the year. As we wind down 2023 and look ahead to 2024, we want to share with you some of our team’s favorite charts on the year. We’ll kick it off with two of my favorites followed by some picks from across the team. The Year Played Out as Expected You might not believe it, but this year actually played out just like it was expected to. Pre-election years are usually strong, but they are even better under a first-term President, up more than 20% on average (something we should hit this year). Breaking the four-year presidential cycle down by quarters, stocks tend to do quite well the first half of a pre-election year (like 2023), catch their breath in Q3, and then gain into year end. Does that sound familiar? Below is a chart I’ve probably shared 100 times this year, but I’m still amazed how well it all played out. Inflation Was Expected to Come Back to Earth Here’s my other favorite chart of the year. We started sharing this chart late last year and it was one of the main reasons we expected to see inflation come back down, likely opening the door for a Fed pivot away from their hawkish stance. In the chart below we look at private data from Apartment List showing that rent prices collapsed well ahead of the government’s data. I won’t get into all the reasons why now, but the government’s data lags by many, many months and this was a subtle clue that shelter (40% of the core Consumer Price Index) was likely going to crack eventually. Sure enough, late this year we started to see shelter inflation slow and this opened the door for the Fed to pivot (exactly what they did on December 13). The Manufacturing Renaissance is Here Below is Sonu Varghese, VP, Global Macro Strategist’s favorite chart of ’23: I’ve never seen an economic chart like this, especially one related to factory construction of all things. This is a massively underrated story of what’s happening in America right now, and brings together several key themes that center around a renaissance for American manufacturing: Reshoring Business investment into high-tech equipment like semiconductors (a lot of it driven by AI hardware needs) and EV batteries Significant incentives from the Federal government to spur private investment in transformational technology The good news is that this is not just a 2023 story. There’s going to be more coming, and the “fruits” of these investments will be seen over the next decade in America. AI YAI YAI! And from Jake Bleicher, Portfolio Manager, a stock chart candidate for top chart of the year: To me, the narrative of 2023 is captured by a chart of NVIDIA, the maker of high-end computer chips that have become the bedrock of artificial intelligence. Emerging from the depths of the 2022 bear market, the introduction of ChatGPT illuminated the potential of AI for the layman, igniting a remarkable surge in related tech stocks. Despite higher interest rates, mega-cap technology companies roared higher. As we approach 2024, the AI theme appears enduring, but investors are now recognizing its broader implications as this transformative technology permeates businesses of all shapes and sizes, not just mega cap tech. Source: FactSet 12/18/2023 Yields Back Where They Started And here is Barry Gilbert, VP, Asset Allocation Strategist’s top chart from ’23. For me, nothing tells the story of markets in 2023 like yields, and the 10-year Treasury yield is a great reference point. We can read off its movements all the big stories of 2023: accelerating disinflation; an aggressive Fed; and a thriving U.S. economy despite all the skeptics. The 10-year Treasury yield entered the year at 3.88% and it looked like rates might be starting to stabilize after peaking near 4.2% in October 2022 and causing a heap of pain going back to the summer of 2020. But the Fed was determined in its fight against inflation as the economy continued to defy expectations. By mid-October, the 10-year Treasury yield was just short of 5% and at a level not seen since before the Great Financial Crisis. But then a funny thing happened. The disinflation expected by many accelerated, economic growth went from great to just pretty good with a few downside economic surprises, and a tough-talking Fed began to use more balanced language. The flood gates of bond demand opened and we saw the 10-year Treasury yield plummet more than a full percentage point in about two months, taking it back to just a little higher than where it started the year. With the yield curve flat, no movement in the 10-year yield for the year left returns for short-term Treasuries and intermediate bonds about the same. But if you were willing to still shy away from rate-sensitive bonds early in the year and add rate sensitivity aggressively late (consistent with Carson Investment Team recommendations), it was a pretty good round trip. We often connect our “no recession in 2023” call to our equity overweight, but where it may have had a more profound impact, especially in bond-heavy allocations, was on the fixed income side, another reason why the 10-year Treasury yield is my candidate for 2023 Chart of the Year. Value and Growth Also Back Where They Started And here is Grant Engelbart, VP, Investment Strategist’s top chart from ’23: The decision to invest in value stocks or growth stocks is one of the most impactful an equity investor or manager can make, and something I keep a close eye on. 2022 was a painful year across asset classes (sorry to bring it up!), but on a relative basis, value investors did quite well. Now relative performance doesn’t pay the bills in a down year, but value did provide some help in 2022 by outperforming growth stocks by the most since the tech bubble burst in 2000! As we know, the stock market has a tendency to react in ways that go against the expectations of the crowd. And sure enough, in 2023 growth stocks began to outperform value stocks, and did so in dramatic fashion. Thus far in 2023, growth is outperforming value by the second most since the inception of the widely followed Russell style indices (1979). My chart of the year is the returns of value and growth stocks relative to the broad Russell 1000, which encompasses both. When you look at the picture from the beginning of 2022, all of the outperformance of value stocks has now been washed away by the growth rebound in 2023. The game is tied 0-0, right back where we started! If these massive divergences don’t beg for a balanced investing approach with highly research-driven decisions around portfolio adjustments, I don’t know what does. What a year is has been. We are honored you’ve been with us on this ride and we will continue to do all we can to be the most trusted and transparent research shop out there.
DJIA and NASDAQ Best on First Trading Day of New Year Over the past 21 years, DJIA and NASDAQ have enjoyed the greatest frequency of gains on the first trading day of the New Year, both up 66.7% of the time (up 14, down 7), with average gains of 0.49% and 0.70% respectively. S&P 500 and Russell 2000 have been up 57.1% (up 12, down 9) also with solid average gains of 0.53% and 0.40%. On the second and third trading days of the New Year, performance has been weaker with a modest bearish bias. Average performance turns negative across the board on the second day and is mixed on the third.
The Triple Play Kings of 2023 Mon, Jan 1, 2024 Another earnings season is on the horizon, and throughout the reporting period, as we do each quarter, we'll be on the lookout for opportunities from companies reporting earnings triple plays. While we're waiting for the fresh batch of reports, we wanted to provide a quick update on triple-play trends from 2023. As a reminder, an earnings triple play is a company that reports earnings and manages to 1) beat analyst EPS estimates, 2) beat analyst sales estimates, and 3) raise forward guidance. In 2023, there were a total of 560 earnings triple plays during the year, and the average one-day performance of the companies reporting them was a gain of 6.10%. Within those 560 reports, 32 companies managed to report three or more triple-plays, six of which had four triple-play reports in the calendar year. Below is a complete list of all the companies that fit the bill of at least three triple plays in 2023. It’s important to note that just because a company beats estimates and raises guidance doesn’t necessarily mean its stock will rally. As shown, several names in this list are down on the year, regardless of their strong earnings relative to expectations. In total, 130 of the 560 triple plays were accompanied by negative returns on the stock's earnings reaction day. Tech stocks had the biggest turnout on the list, accounting for over 40% of the names listed. Consumer Discretionary followed but had only half as many names as Technology (7) followed by Health Care (4), Consumer Staples (3), Industrials (3), and Financials with one. Of the fourteen tech stocks listed, four had triple plays every earnings season this year. Two notable names on this list include DraftKings (DKNG) and Duolingo (DUOL). Both stocks were up more than 200% in 2023, and both beat EPS and revenue estimates in every earnings report of the year. If not for inline guidance once each, they’d both be joining the club of four 2023 triple plays too. Zooming in on the six companies to report triple plays every earnings season in 2023, the triple play kings, all but one significantly outperformed the S&P 500 in 2023. Excluding Clear Secure (YOU), each of the five others at least doubled the performance of the S&P. The most impressive of course has been NVIDIA (NVDA) which ripped 239% in 2023, followed by e.l.f Beauty (ELF) which also doubled. Collectively, on an equal-weighted basis, the six stocks were up just over 100% on the year. The chart below features points to mark each earnings report of the six triple play kings, and below that we have included a table showing each stock's earnings reaction day performance to their report. The second quarter was particularly strong in terms of earnings day reactions as triple plays from NVDA and ELF led to gains of 24.4% and 20.5%, respectively on 5/25. Again, it’s worth mentioning that strong earnings don’t necessarily guarantee share price gains. Zscaler (ZS), although more than doubling in 2023, reported a triple play in March that resulted in an 11% pullback. On a broader scale, YOU fell more than 20% on the year despite reporting four triple plays. Not even NDVA could avoid a negative reaction to a triple play when it fell 2.46% following its last earnings report. In fact, besides ELF every one of the ‘triple play kings’ listed had at least one down day in reaction to a triple play earnings report this year. Those were the triple-play kings of 2023. Will they retain their crowns in 2024? Or will a new crop of earnings royalty emerge to form a new empire? We'll start to find out in the next few weeks. Happy New Year!
4 Takeaways from 2023 Market Superlatives 2023 is now in the books. It was a year that no-one expected, but to the upside, which is the way we would all have it. The anticipated recession that didn’t come was overpriced into the market with 2022’s S&P 500 decline of 18%. Those declines helped the index power ahead to a 26.3% gain on a total return basis in 2023. That left the S&P 500 with a modest 3.5% gain over the last two years and an annualized growth rate of 11.9% over the last 10 years, which is good but not scary good compared to the 50-year annualized growth rate of 11.1%. In fact, it ranks as only the 41st best of the 87 10-year rolling periods going back to 1937. (For the curious, the best 10-year period was 1947-1958 with an annualized 20.1% gain.) Bonds came roaring back in the fourth quarter, giving the Bloomberg U.S. Aggregate Bond Index (“Agg”) a return of 5.5% for the year, just ahead of the Bloomberg US Short Treasury (1-3 month) Index at 5.1%. This was the first year of gains for the broad U.S. benchmark after two years of declines, which had marked only the fourth and fifth year of declines in the index’s history. But if you only paid attention to full year returns, you missed the story. The Agg was down for the year through three quarters and then posted its best quarter in over 20 years, with a gain of 6.8%, providing solid benefits for those who had lengthened the maturity of bond holdings over the year. The Bloomberg US Aggregate Securitized – MBS Index and the Bloomberg Municipal Bond Index also both had their best quarter in over 20 years, finishing the year with total returns of 5.0% and 6.4% respectively. The broad decline in yields was so sharp in the fourth quarter it likely pulled forward some potential 2024 gains, but we expect bonds to have another solid if unspectacular year ahead as the Federal Reserve starts to lower interest rates, while also continuing to return to their traditional role of portfolio diversifiers as inflation continues to move towards the Fed’s target 2%. One of the biggest stories of the year was the run for large cap growth stocks, anchored by the technology-oriented mega caps and the chipmakers most closely associated with artificial intelligence. The Russell 1000 Growth Index climbed 42.7%, its best year on record (going back to 1979), surpassing even the best years of the “dot com” bubble. Some of this was make-up for underperformance in 2022 when the index lost 29.1%. After such strong separation from value, we expect performance between growth and value to be more aligned in 2024. Finally, the fourth quarter saw the Russell 2000 Index of small cap stocks outpace the Russell 1000 Index for only the second time since the first quarter of 2020. Small caps were hit hard by the regional banking crisis early in the year, compounded by their greater sensitivity to higher interest rates due to funding costs. Those losses had pushed valuations to historical extremes compared to large caps. Small caps have come very far very fast, with one of their best rallies ever since bottoming compared to the Russell 1000 on November 10. Nevertheless, the Russell 2000 only returned 16.9% for the year compared to 26.5% for the Russell 1000. Small cap valuations have moved more in line with historical averages with the recent rally, but the Russell 1000 still trades at a substantial premium to history so the separation between them is historically meaningful. It may require some patience, since valuations are a poor timing mechanism, but we believe there is still scope for small cap outperformance over a strategic time frame. There you have it. A surprisingly strong year for stocks and a solid year for bonds, considering where they were after three quarters. Growth stocks had a stellar performance with a boost from the AI frenzy. Small caps were spectacular late in the year but still lagged behind large caps over the year by a wide margin. All setting up an interesting 2024, with recession calls somewhat lighter than a year ago, but still quite a bit of gloom out there with some large shops still holding onto their recession call. (Stick to a call long enough and you’ll never be wrong, only early.)
European Golden Cross Fri, Jan 5, 2024 Like their peers in the US, European stocks enjoyed quite a rally over the last two months of the year. In early December the STOXX 600 broke out above the resistance of the summer highs, and while momentum has slowed in the last couple of weeks, earlier this week the index experienced a golden cross where its 50-day moving average (DMA) moved above its 200-DMA as both were rising. Technicians consider these types of formations to be bullish in terms of longer-term returns, but are they? The table below summarizes the performance of the STOXX 600 following prior golden crosses since the index's inception in 1987. Looking across the table, forward returns were generally better than average over the following one, three, and six months, but over the following week and year, forward returns were weaker than the average long-term returns for all one-week and one-year periods. So, contrary to conventional wisdom, golden crosses in the STOXX 600 have not necessarily been a precursor of better-than-average returns. What's also notable about this week's golden cross is the fact that it occurred on a day when the STOXX 600 declined 0.9%, While four of the six prior golden crosses occurred on days when the STOXX 600 was down, the only one where it was down anywhere nearly as much as it was on January 3rd was back in May 1995.
Market Generally Better Before Martin Luther King Jr. Day than After This year will be the 27th year that the stock market will be closed to honor Dr. King and his contributions to the world and civil rights. Martin Luther King, Jr. Day has only been observed since 1998 and market behavior around this holiday has not been added to the Stock Trader’s Almanac yet. We wanted to share with you the history of market performance around this holiday. Overall the market has been more positive, on average, on the Friday before MLK day and weaker the Tuesday after. Though trading is rather mixed with a relatively even split of ups and downs on the day before and the day after. DJIA has been notably weak on Thursday, down 17 times in the last 26 years. This mixed and choppy performance is possibly due to the fact that MLK day can either land in options expiration week or the week after. Both weeks have been rather volatile and weak since 1999.
Under the Hood: Fourth Quarter Earnings Kickoff JP Morgan kicked off earnings season on Friday as the bank wrapped up its most profitable year ever. While the prospect of lower interest rates in 2024 may temper record profits, the outlook was more optimistic than anticipated. Jamie Dimon, the bank’s Chairman and CEO, acknowledged that the company is over-earning on both interest income and credit, but as these factors normalize, JP Morgan anticipates achieving earnings near record levels once again in 2024. This better than expected outlook supports the Carson Investment Team’s financial sector overweight in the 1st half 2024 Outlook. Investors are looking for companies to eke out the second consecutive quarter of year-over-year quarterly earnings growth, following declines that commenced in late 2022. While expectations call for only 1.3% growth in the fourth quarter, analysts expect S&P500 earnings will snap back to a brisk double-digit rate in 2024. Investors will be scrutinizing the full year guidance that many companies give on their fourth quarter update calls for clues that support the optimistic outlook. Against a backdrop of easing inflation and improving efficiency, a key component of earnings growth in 2024 is expected to come from margin expansion. This healthy margin expansion hinges on operating leverage, rather than simply cost cutting measures. The focus is on identifying companies capable of growing sales at a rate that outpaces expenses. It’s crucial to strike a balance between growth and efficiency, because without growth, achieving margin expansion comes at the expense of deeper cuts that could impact the overall quality of the business. Therefore, a healthy combination of both growth and efficiency will be key for fundamentals to live up to expectations. The initial glimpse offered by JP Morgan, and peers like Bank of America and Wells Fargo, coupled with commentary from UnitedHealth and Delta, suggest that perhaps the tide isn’t turning as fast as anticipated. The US economy remains resilient, and consumers continue spending. However, inflation may be stickier than initially expected as companies expect wages, fuel prices, and healthcare costs to continue rising in 2024. This narrative aligns with recent economic data that suggests investors may have gotten a bit ahead of themselves on the timing and magnitude of rate cuts. With only a handful of companies reporting, it’s far too early to draw any meaningful conclusions, particularly from the banks where margin on interest income was already expected to soften this year. Regardless of the path to earnings growth in 2024, initial commentary suggests that demand remains resilient which supports top line growth and thus the first component of operating leverage. I expect the efficiency narrative to gain some steam as other sectors, like technology and communications, offer their outlooks. These important sectors that drive much of our economy have been reducing headcounts and right-sizing operations for some time now and much of that work should bear fruit in the form of margin expansion, and ultimately earnings growth, in 2024.
Carson Investment Research Releases Its 2024 Market Outlook: Seeing Eye to Eye What a strange year we had in 2023. There were few places where market participants, strategists, policymakers and the economy saw eye to eye. Most strategists missed the underlying strength in the economy, leading to too much pessimism about stocks in what turned out to be a strong year. Skepticism about the bond outlook and a flight to money market funds looked justified until the last quarter, when bonds rallied sharply. And consumers remained gloomy for most of the year about what was really a pretty good economy despite the most aggressive Federal Reserve (Fed) rate hike cycle in decades. Carson Investment Research took an unpopular contrarian stance in 2023, calling for the expansion to continue and stocks to post solid gains, based simply on what we were seeing in the data. Consensus has moved toward our view in 2024, but we still see quite a bit of gloom out there, with a number of strategists holding to their recession calls. We take a deep dive into our Outlook for 2024 in Carson Investment Research’s Outlook ‘24: Seeing Eye to Eye. DOWNLOAD OUR 2024 MARKET OUTLOOK The Macroeconomic Backdrop As we look at the year ahead, we see even lower odds of a recession than we did in 2023, as signaled by our proprietary Leading Economic Index (LEI), which places less emphasis on manufacturing and business sentiment and more on consumer spending (which makes up more than 2/3 of the economy) than some of the more widely followed LEIs. With the Federal Reserve very likely to start cutting rates in the first half of the year, and a solid job market supporting incomes, there’s plenty in place to support continued growth. We also see strong potential for some pick-up in productivity growth as falling interest rates support business investment. Lower rates may also help sustain momentum in new businesses creation, which typically also gives a boost to productivity. And let’s not forget technological advances. It usually takes a decade or more for new technologies to impact the broad economy, but the pipeline is strong (artificial intelligence was already being actively deployed a decade ago even if “generative AI” is new). In addition, the investment in the U.S. high technology manufacturing base in the last year has been extraordinary. This economic environment should support solid earnings growth and improved margins, leading to a good year for markets. Yes, 2023 was a strong year, but historically that has not been a harbinger of market downside. To the contrary, it’s actually pointed to a pretty good market in the following year, only limiting the likelihood of a blockbuster follow-up year. The four-year election market cycle, which has held largely true to form in 2022 and 2023, also signals a solid year, especially when we have a first term president (independent of party). What may look different for stocks in 2024 is for the market rally to broaden. While a lot of attention was given to the strength of U.S. mega-cap stocks in 2023, we were already seeing increased market breadth and valuations point to the possibility of that trend continuing, potentially support small- and mid-cap stocks. After a strong late year run for fixed income, some of the expected returns for bonds may have been pulled forward, but we still see as solid year ahead for bond as inflation continues to fall, the Fed lowers short-term rates, and flows from money market funds and other short-term instruments supports demand after the great flight from bonds in 2022 and 2023. Something close to the yield-to-maturity for the broad investment-grade Bloomberg US Aggregate Bond Index would be perfectly satisfactory. As important, with a higher starting yields and falling inflation, bonds are less vulnerable to losses and are once again more likely to add some ballast to a portfolio during periods of volatility. Our bottom line: We expect markets, many strategists, and policymakers to once again largely see eye to eye in 2024 on broad outcomes, although we continue to tilt more optimistic than most based on the underlying data. We continue to favor the U.S., although valuations should help international markets see reasonable gains as well. While emerging market valuations are depressed, policy uncertainty, especially in China, continues to weigh on prospects. In fixed income, our economic outlook supports some tilt toward credit-sensitive bonds but we prefer reflecting our economic outlook by overweighting equities. Remember, even good years exhibit some volatility so it’s important to be prepared to weather the market’s normal ups and downs. A 5% pullback in stocks is something that has historically occurred around 3-4 times a year, while a 10% correction occurs at least once a year. And a 20% bear market has historically occurred once every three years. Carson Investment Research will be there to help, continuing to emphasize facts, not feelings, in our blogs, podcasts, and commentaries as we navigate the markets in 2024.
