Stock Talk - 2024 Stock Market Outlook: Volatility, Goldilocks, and Presidential Cycles

Starting point is 00:00:00 Okay, investors, something looks a little different today. Yes, you're seeing things clearly. I'm not. And most strategists and people on Wall Street probably should be wearing an eye patch when they do their forecast for the next year because most often than not, things are neither accurate or precise. So if you're wondering what happened, I had emergency retinal surgery last week, but I wanted to keep rolling out our 2024 market outlook because it is the end of the year. People keep asking, even though we believe,

Starting point is 00:00:30 to it for almost 12 months now. So last week we released the first part, it's Goldilocks meets volatility, 2024. We do have a price objective for the first half of 5,000. That really hasn't changed. We've talked about that for six to 12 months, because we currently are following the path of 1999 through 2000, both from the Fed, from inflation, from interest rates,

Starting point is 00:00:55 most everything we see going on. That's continuing right now. And last week I was out, but I was following stocks for our clients and prospects. And a lot of the moves we were seeing, whether it's Bitcoin, whether it's semiconductors, still mirroring the 1999 scenario, which that's a good thing, because that means the market can get near all-time highs here into the end of the year, as we suggested over the last six or 12 months. However, it doesn't leave a lot of upside for 2024 in particular.

Starting point is 00:01:29 percentage terms. And it would say that volatility is going to return pretty substantially in the first quarter of next year. That was our release last week for our first part. This week, I wanted to cover the Goldilocks part that people talk about. If you turn on the financial news networks, you'll hear strategists talking about it's a Goldilocks economy, meaning it's not too hot, not too cold. It's just right, just like in the fairy tale. The Thumbnail last week was kind of an ode to that. Corinne, I want to give a shout out too, came up with a great clip with me over Goldilocks

Starting point is 00:02:08 with some paddles to shock her with because of the volatility we expect next year. So what do economists and strategists mean by Goldilocks? So you know, if you followed me for the last couple years, I don't like nebulous terms, I like data. So we've shown this in the past, the data says Goldilocks is an economy, where GDP grows between 3 and 5%.

Starting point is 00:02:32 So it's pretty precise. It's not growing too fast, it's not growing too slow. And it's comprised of both real growth rate and inflation, because when you add the two together, that's what you get for GDP, of between one and a half and two and a half percent of real growth and one and a half to two and a half percent of inflation.

Starting point is 00:02:52 So on the low end, one and a half plus one and a half equals three, on the high end, two and a half plus two and a half equals five. So that's the sweet spot. And it's when stocks can actually enjoy their generally biggest and most consistent gains, because companies can look at their business and say, hey, I know within a reasonable doubt what my growth is going to be next year,

Starting point is 00:03:18 what inflation's gonna be, what my costs are gonna be, and I can invest. You know, inflation's really high like it was two years ago, I think it was running about 9% in June of 2021, companies have a hard time figuring out what their costs are going to be. When things are deflating, and inflation is coming down really quickly, companies get scared because they're not really sure if that's just pricing falling off a cliff or if it's demand. So the sweet spot, the Goldilocks spot is 3 to 5 percent GDP growth, and it's a combination of inflation and real growth. So that's a good

Starting point is 00:03:51 thing, right? And that's more likely where we're going to be in the first half of next year. It's also the Goldilocks part of the economic cycle and stock market cycle, because we've talked about this before, the presidential election cycle. And whether you like it or not, whether you're Democrat or Republican, it hasn't historically mattered who was sitting in office of the presidency for stock returns, particularly during the sweet spot of the presidential cycle, which we talked about in advance was the fourth quarter of the second year presidential term through the very middle half of the fourth year. So that would just so happens to be in October of 2022 through somewhere between April and June of next year, 2004. And if you looked historically, whether it's

Starting point is 00:04:43 a Democrat or Republican president, the returns you get in the stock market are the best during those quarters. Why? Because the president is looking to get reelected. So he's, stimulating the economy as much as they can to try to get the economy going so that he gets reelected. And most of those measures, whether right now I guess they're the Inflation Reduction Act, which we've discussed in the past, not really well named, a lot of those measures were hitting in 2003 in the second half and they'll be hitting in the first half at 2024, but they start to get calendarized in the second half of 2024. So, you know, all the economic benefit is, it's going on right now and it'll continue through the first half of next year. However, it kind of starts to fall off

Starting point is 00:05:37 because as you get closer and closer to the election, the sitting president gets less and less things done, which a lot of times is a good thing, but, you know, it creates a slow down in economic growth creates increase in uncertainty. Stock market generally doesn't perform particularly well into the election. So that's what we're looking for as well next year. You know, our outlooks are done in six months segments. So right now we're sticking with the first half. We continue to see, you know, a strong end of the year.

Starting point is 00:06:11 We talked about it into the October lows that seasonality should kick in. Santa Claus rally starts at the end of October. It doesn't start right around Christmas. If you wait until Christmas, you're going to be too late. Extends almost right into the end of the year. What we should look for for next year is some decent returns in the first half. But by decent, if we're closing 2003 at or near all-time highs, which would be, say, 4750 to 4,800, you know, 5,000, it sounds like a huge number out there.

Starting point is 00:06:44 And the TV personalities are making it out to be like this grandiose number. from 4,800, 5,000 is about 5%. You know, 5.5 to 7.5%. And if there's lots of volatility to get there when you're comparing it against a two-year treasury or a one-year treasury, which is kind of your alternative short-term, it's about the same return. So, you know, longer-term investors should be sticking with their plans,

Starting point is 00:07:09 that they sat down with their financial advisor, don't make big changes. You know, people who are looking at shorter-term returns, you know, there are tools out there that are more tactical in nature that look like will probably be of a lot of use next year because we do expect higher volatility. The buy and hold strategy while long time frames is very beneficial from a tax perspective and a cost perspective, don't think it's going to be highly effective next year in that there should be a lot of volatility coming our way in the first half. You know, so probably right out of the gate is some people try to take some gains that they built up over the last year or two.

Starting point is 00:07:54 And if the market's near all-time highs, you know, they're going to like, okay, it's 2024. I don't have to pay taxes in 2003. If I sell early in the year, I don't have to really pay taxes until the end of the year on that stuff. So expect volatility to pick up at the beginning of the year, provide a good buying opportunity by mid first quarter. and we expect earnings to be reasonable in the first quarter of next year. So, you know, one of the things I will not talk about is trying to come up with a target on the S&P 500 based on valuation. Valuation that we discussed and shown is a horrible market timing tool over months, quarters, and even one or two years. Over 10, 20 years, it's a fabulous tool.

Starting point is 00:08:39 You want to invest as much money as you can during recessions, when things look bad, when valuations are low. and then not touch it again and wait for the economy to pick up and compound your money. But over short time periods, you know, if you think about these strategists on the sell side, they have a number on the S&P 500, I think, for 2024. The number I've heard is $250 in earnings, okay? $250 in earnings. So what multiple do I put on that? Do I put a 20 multiple on that?

Starting point is 00:09:09 If I put 20 multiple on that, it's 5,000 right in line with what we have. You know, if you go by the multiple rule of, if you take a 10-year treasury, say it's yielding 4%, or maybe it's not quite there yet, but say it gets to 4% next year. You take the 4% yield and you flip it, you do the ratio, that would be 25. Some people have this, you know, a rough estimate that that's the multiple you can pay on the S&P 500. So 25 times 250, that's a number well. in excess of 5,000. You know, I don't like that because if you're off on the multiple by one point, that's 250 S&P points, which at this level right now, that's like 5%. You know, you can, you can miss your return by 100%, thereabout, you know, a return of 5 to 10%, that's an error of 100%

Starting point is 00:10:04 and still be correct. So, you know, we try to be as precise as we can, knowing that we'll more often to not be wrong, but you know, I like to know I was wrong for these reasons. So as opposed to just making this massive spread out there and saying, oh, we got, you know, part of it right. So that's, that's what we're seeing here in the first half of 2024. The Goldilocks economy, yes, it's there from a GDP standpoint, from an employment standpoint, from inflation coming down. Fantastic. However, we do expect higher volatility in the first half to negate some of that Goldilocks outlook. So we'll be looking for opportunities for our clients mid first quarter, a little later in the first quarter, to do some additional buying if things play out the way we are seeing it,

Starting point is 00:10:54 even with one eye open. So from the whole team here at O'Carvis, from the investment team, from Troy, Jessica, James, everyone, myself, included, have a blessed weekend. contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an

Starting point is 00:11:37 offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - 2024 Stock Market Outlook: Volatility, Goldilocks, and Presidential Cycles

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