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Happy bad (cold) weather January to our loyal readers and subscribers.  Hopefully, you are warm, safe, and have power.  It is “dreadful” out there unless you are one of the very few who find yourself in a pleasant place with sunny skies, warm(er) weather, and not affected by the crazy Polar Vortex system most of us are under right now.

The Market found its positive footing this past week. 

After a negative four day start to the New Year last week, the S&P started the week with a strong day out of the gate on Monday and the first full week of trading for 2024.

For the week, the S&P 500 was up almost 2% and went into the green for the year to date by a small amount (0.29%). The S&P 500 is now up 10 of the last 11 weeks (bullish) and triggered a weekly all-time high as illustrated on the chart below:

It had been a while since we saw new highs on the S&P 500.  See chart below:

All signs are that the markets (S&P 500 & Nasdaq Composite) are broadening out.  This, too, is a bullish sign.  See chart below:

This week, the S&P was once again carried by the Magnificent 7.  Looking at the heat map, it was all about Growth stocks and, in particular, the same technology and AI favored stocks of the mega cap 7 that fueled the majority of returns from 2023.  See below:

As you can tell from the upper left corner, the new king is Microsoft.  Its market cap now exceeds Apple’s.  See the two charts below:

Most of the sentiment readings we follow are continuing to show “green lights” and reflect on the optimistic, bullish stock market environment, for the moment.  See chart below:

When thinking/researching about additional market commentary today, I went through all the relevant and hot topics, including the cold weather, the ongoing problems in the Middle East, a potential resolution of keeping the Government open as well as the latest CPI readings, which came out slightly above expectations last week, but not enough to “spook the markets”.

I settled on the recurring theme of “What’s in store for ‘24?”.   Today, with the help from a talented and interesting writer (Jim Woods) at our partner firm, Eagle Publishing, I want to tread into several scenarios that could play out for the remainder of 2024 and what effect these could have on the stock market (S&P 500).

An exuberant November-December 2023.

To review recent history, at the beginning of November, Chairman Powell of the Federal Reserve pivoted much more than the market had expected.  Going from their overly “hawkish” posture during 2022 & 2023, Chairman Powell & Company sent a deliberate message that we are NOT going to see any additional Fed Fund raises and we should expect up to 3 interest rate cuts in 2024.

I would suggest that the stock market had already begun to believe this about a week earlier when the markets, after a prolonged decline that began at the beginning of August, began its ascent.  Aided by dovish words from the Fed, we had one of the best November & December stock markets in many decades.

However, economic prognosticators, market analysts and the market itself, started factoring in two things which we do not yet agree to:  1) Interest rate cuts would begin in March and; 2) that the Fed would end up cutting as many as 5-6 times.

How did this happen? 

1. It was predicated on the fact that the Federal Reserve (and its governors) must be seeing significant signs of the economy slowing. Much more than they are leading on to.
2. Inflation must be coming down faster than we expected. NY Fed inflation expectations were lowered recently from 3.4% on core to 3.0%.  Some even expect disinflation to begin to take hold later this year.
3. Interest rates are too high, and the Fed has been witnessing economic destruction in certain parts of the economy like residential home sales and real estate (commercial buildings).
4. They observed that they had become “too tight” and this was creating problems for financial firms, bank loans and other small businesses that were having a hard time borrowing much needed capital
5. This being an election year, the Federal Reserve wants to help the current administration maintain some equilibrium without forcing the economy into a recession.

We want to explore three potential scenarios that might play out this year with you.  The market valuation used by Jim Woods at Eagle Publishing is conservative.  Please note we are NOT predicting these levels in the market, just offering a reasonable valuation.  You may recall that my career began at firms that did valuations on all stocks and the market in general.  It is important to know what kind of earnings we might expect and a reasonable valuation for that earnings level.

The Important factors that influence the markets the most.

The areas likely to have the most impact on the direction of the market these next 6 months will be 1) Treasury yields and success at the auctions; 2) Geopolitics, including will the war in the Middle East which could expand out and draw the US in even more; 3) Domestic politics; 4) Earnings and growth rates of US companies that are key drivers of stock market health and breadth.

As yet, NONE of these are having a major influence on the market at the present time.  However, if inflation were to really tick up, earnings slow or explode, interest rates decline or back up, or geopolitical risks expand, any one of these could have an immediate impact (positive or negative) on the markets.  Let’s explore each scenario below:

The Current Situation

Right now the market is continuing with the thought that we will see interest rate cuts by the Fed sooner than later.  We don’t buy it and think it may not be until mid-summer that we actually see a decline in the Fed Funds.

S&P 500 earnings are expected to hold steady at $245 a share.  With a multiple range of 17.5x to as high as 20x, we could see a range of 4,300 on the S&P to 4900.

Things Get Better

If a number of economic statistics (ISM, Purchasing Managers Index - PMI, unemployment claims and layoffs) come out indicating the economy is slowing, but not too much.  Also, inflation continues to decline towards the Fed’s 2% target, then this is a Goldilocks scenario, and the Fed will likely hint of a March rate cut.

It would be reasonable under this expectation to see the S&P 500 trade above 4800 and even possibly get to 5200 as multiples will expand with the idea of lower interest rates.

Things Get Worse.

If inflation picks up and/or the Fed materially pushes back on the idea of rate cuts in March (and for much of 2024), economic growth begins to accelerate and inflation (CPI/Core or PCE Price Index) ticks up, this scenario would negate much of what the Q4 2023 rally was all about.

The result would likely be a substantial decline in stocks and give much of the 4^th quarter 2023 back. Most investors are unwilling to look at this scenario but this is a legitimate possibility.  We saw a big uptick in inflation and interest rates in the 1970 after the initial decline from high inflation rates, eerily similar to 2022 and 2023.  It could happen.

If this happens then it is possible for us to see a 3600-3800 market (or lower) as adjustments are made to handle the “higher for longer” interest rate environment.

We provide a table showing these three scenarios below.  This was created by Eagle Financial, and we differ slightly in our expectations of where the markets may go.  However, the concept and scenarios we are in agreement with.

To go along with this chart, Mr. Woods/Eagle also put together their expectations for what S&P 500 valuations might look like with the three above scenarios.  Please note that they may be a bit more negative than us as we think both the upper (and lower) bands of these scenarios could be greater.  See chart below:

Thank you for reading.  Stay warm, safe and good luck on your trading.

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