Stock Talk - Breaking Down BOFA’s 70+ Page Report: Is SP500 @ 5000 Inconceivable?!

Starting point is 00:00:00 Investors, it's December 1st and it's that time of the year when sell-side brokerage firms and their strategist teams put out their forecasts for 2024. Recall that most of these large brokerage firms have more than one strategists, and I've counted some of the big banks with upwards of 10. They generally take on the old fidelity model of publishing all their targets, so inevitably, at least one of the myriads of forecast will prove omniscient in the years ahead. And they can advertise, we nailed it. Our team has felt compelled to join in on this exercise for the last five years to help give our clients an idea of how we differ from the more widely known financial firms. We typically put out our forecasts and broader market outlooks every six months, as the world can twist and turn more than once a year. No, I'm not going to formally do our outlook today, and I'm skipping the data and chart dump I usually incorporate in my videos this week. Just before Thanksgiving, Savita, Submarian, the head of equity and quantitative strategies at Bank

Starting point is 00:00:59 America's Securities, that's the old Merrill Lynch, put out her outlook for 2024 in a 80-page report loaded with data. Savita is one of about five strategists at Merrill Lynch that our team follows, largely because many of them are quantitatively based. Her report's title is, five reasons for the S&P 500 at 5,000 in 2024. You would have thought she discovered the process of alchemy. CNBC splattered this across the news feed for days and other financial networks and website, short sellers, and the Forever in the Bear Camp went berserk with negative comments and internet posts. While this week is not our 2004 outlook release, frequent consumers of my material should not

Starting point is 00:01:41 be surprised by this week's title. S&P 500, 5,000? Inconceivable. No, it's just more of the old normal. Investors, if this number 5,000 for the S&P 500 for 2024 looks familiar to consumers of Oak Harvest investment content and research, it is. It's the number I've discussed for the first half of 2024 for the S&P 500 for our optimistic outcome since the October 2022 lows for over a year now.

Starting point is 00:02:09 Savita's system measures and weighs, and then it combines five different models, measuring a range of fundamentals, some valuation and some technical factors. It weighs them, and then it arrives at a target for 2024. Frankly, I find that she uses too much data at times, but her work does include earning surprise indicator, a long-term valuation indicator, price momentum indicator, and my favorite sentiment sell side indicator. These individual models spit out a 2024 target of the S&P 500 that ranges from a low of 4378 to a high, a 5349. She then weighs them based on historical accuracy and comes up with her official S&P 500 target for 2024, which is 5,000. With her publication,

Starting point is 00:02:54 the financial channels and investment blogs exploded with comments of this one. Investors, $5,000 for a target of the S&P 500 for 2024 is not heresy. We've been discussing this level for over a year. You can re-watch our content and see how we arrived at it almost 1,000 S&P 500 points ago. But at near 4,600, like we were during the summer, it's, one, not a Herculean call. Two, should not elicit FOMO or fear of missing out, or third. Three, tempt you to change your long-term financial plan yet. First, I'd like you to think of it this way.

Starting point is 00:03:30 It requires you to break out your calculator. And this is exactly how I thought of it when the market reached about 4,600 in mid to late July of this year. This is when FOMO on the TV channels was kicking in, but our investment team was messaging to be patient that a summer pullback and buying opportunity was likely forthcoming into late October. Okay, ready? Break out your calculator.

Starting point is 00:03:52 What's the yield on a two-year treasure? right now. Yes, it's about 4.95%. As of this writing last weekend, the cash S&P 500 closed it 4559.34 on the week. Take that number and multiply it by 0.04-955. Why? Because a year from now, that's what would be the theoretical equivalent break-even level on the S&P 500. First, buying a two-year treasury if you liquidated all your S&P 500 funds and bought a two-year treasury and held it for 12 months from now. What's the number you get? My calculator says it's roughly 4785,

Starting point is 00:04:31 which happens to be near our previous 2021 all-time high. And if you take that 4785 and multiply it by another 1.04-955, you get what number? You get roughly 5,022, which says if you had zero tax effect, if you liquidated all your stocks right here, right now, and bought treasuries versus a target of $5,000 for the S&P, 500 in 2024, you're pretty much a wash on expected return. However, we know the volatility inequities is historically much higher than a two-year treasury, so you would probably just buy

Starting point is 00:05:05 a two-year treasury note and watch. Investors, we first arrived at our year-end target and forecast for 2023 for the S&P 500 to rally back to near all-time highs of 4,800 way back in October of 2022. Our team discussed a number of metrics we used to triangulate this forecast in our videos with our clients and prospects, and none of them were valuation-based because the data and history show time and time again that valuation over long-term measured in decades is a great forecaster of long-term expected compound annual returns, but for the short-term, measured in months, an intermediate term measured in a handful of years, it's a horrible short-term timing tool. Investors, in advance of the rally that's been taking place over the last 12 months,

Starting point is 00:05:48 our team discussed, one, the presidential election cycle, and how the fourth-third quarter of the second year through the first half of the fourth year was a sweet spot for investment returns historically. Two, we discussed the Federal Reserve interest rate hiking cycles and how stocks have performed during each stage, the raising, the pausing, and the lowering of interest rates. Three, we discussed investor sentiment, hedge fund, a retail investor positioning, stock market breadth cycles, and how they can create positive expected return profiles for the markets when investors are positioned extremely bearishly. And then they flip pop. positively as they did in late 2022.

Starting point is 00:06:26 And finally, we discussed how these previous factors have historically contributed to cycles of higher and lower trending volatility in the equity markets, and that these factors are triangulated to strong, lower, not higher volatility in late 2023, and a fourth quarter rally that could re-approach 4,600 near Thanksgiving to December option expiration and accelerate up into year end back near old-time highs. which were 4,800. That's the calculation I get using 12 spot volatility at year end, and 5,000 would be the calculation for the markets into late March, 2024 at 12 volatility as well.

Starting point is 00:07:06 I use 12 volatility as a low because outside of 2017, which investors long for again, which looks like a 100-year anomaly, 12-spot volatility, is as low as the market has gone for any short period of time, as in days and weeks, not much. months like 2017. If you look at the old normal, we've discussed all of 2023. Take the S&P 500 since our October 22 lows and overlay it with the October 1998 lows through the internet bubble peak in 2000. This is what it looks like. Investors, if you do the math implied by this pattern and chart, you come up with what? You come up with the S&P 500 nearing 4,800 into New Year's Eve at 2023. You come up with heightened volatility in the first quarter of 2024, but nearing a new

Starting point is 00:07:53 all-time high and yes, 5,000 at the end of the first quarter of 2024. Not inconceivable at all, just more of the old normal for turning to the equity markets. All content 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 offer or solicitation

Starting point is 00:08:34 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 portfolio. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - Breaking Down BOFA’s 70+ Page Report: Is SP500 @ 5000 Inconceivable?!

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.