Stock Talk - Goldilocks Meets Volatility: Decoding 1H2024 S&P 500 Predictions

Starting point is 00:00:00 Okay, folks, everyone in the financial industry is out busy posting their 2024 market forecasts, even though we have yet to print the year-end statistics for 2023 and figure out how far off they were on their forecasts. I guess, given how poorly most of these strategists outlooks proved in 2023, most forecasters don't want people focusing on their bad calls. Maybe these strategists are thinking these kind of things. We called for a recession in the first half of 2003, or was it the second half at 2020? Or was it a market crash for October, 1987 style? Oops, neither of those things happened. Don't bring up those forecasts.

Starting point is 00:00:39 Or maybe they're probably thinking, we were off by a thousand points, calling for S&P 500, 3,000 investors to gorge at that level. Or calling for months for at least a retest of the October 2022, 3,500, 3,600 levels as stocks rallied in the first quarter of 2023. Of course, looking back, none of those things happened either. Move along, folks, nothing to see here. Maybe if we get out our 2024 outlook in November, well, maybe people will forget about our bad 2023 calls.

Starting point is 00:01:12 The investment team at Oak Carvis likes to release six-month outlooks as a lot can change over six months. However, most of the time, at the end of these pieces, we drop in some longer-term thoughts, looking out a year to 15 months. Our second half outlook for 2023 had a year-end target of the SP 500 of between 4730 and 4,800 near all-time highs. It was released back in July and called for a down-then-up move in the markets.

Starting point is 00:01:38 Here's the link to the video in the description below. Last week I gave you, S&P 500 equals 5,000. Inconceivable. No, it's just more of the old normal. As Savita Samarian, the head of equities and quantitative strategies at B.O.A. Merrill Lynch posted her 2024 outlook to much financial press fanfare. Remember, investors, that's her year-end, 2004 forecast. We've had that number lightly penciled in

Starting point is 00:02:02 for the first half of 2024 for well over 12 months. There's a link to last week's video in the description below. This week, I want to bring investors back down to Earth with the cash S&P 500 nearing 4,600, and the financial media out-hyping the 20% year-to-date return for the S&P 500, and this index hitting highs for 2023. I'm sure the sense of FOMO, that's fear of missing out,

Starting point is 00:02:25 is starting to set in for many investors or strategists who incorrectly forecast a recession in 2023, a stock market crash in October, or who just plainly missed the strong November rally off a very normal summer correction. Okay, I want to remind investors that the S&P 500 at 4,600, while strong year-to-date, also means that the overall market has gone nowhere for almost two years since October 2021. While our team remains optimistic for the next four to six months, we don't expected to be a smooth ride through the first half of 2024. This week's title is an ode to one of my favorite bands from the 80s, REM from my home state of Georgia. My title,

Starting point is 00:03:05 given how many now optimistic equity strategists calls are coming out for 2024 is first half, 2024, Goldilocksmeek's volatility. S&P 500 greater than 5,000? Can't get there from here. This video will focus almost entirely on volatility, which is the first metric I use to triangulate forward targets in the S&P 500. That's the metric of tradable volatility. Volatility futures, not the spot VIX index. Frequent followers of our content are probably getting bored of me discussing this one. But it's pretty much where I start every one of my market forecasts. Why? Because portfolio

Starting point is 00:03:40 management is about risk first return reward. And until financial academics come up with a better measurement for risk than volatility or standard deviation in returns, I'm sticking with this one. Remember investors that while many strategists on TV discuss the VIX index, it's not tradable. It's purely a math equation. However, volatility futures are tradable, and those who trade them, well, for a living, are some of the smartest math minds in the financial world. They're more or less insurance salesmen, pricing forward risk in real time. And the best insurance salesmen are those who sell you insurance at the highest price they can, while eventually letting the insurance expire worthless and unneeded more often than not. The volatility and timing

Starting point is 00:04:22 forecasting tool helped our investment team in late 2020, when I'm not. other strategists were preaching doom for equity markets due to the COVID lockdowns. The title for our first half 2021 outlook was looking very bullishly for stock markets. That title was, you ain't seen nothing yet. While our second half outlook for 2021 titled Let the Good Times Roll was also very positive for equities. By the end of 2021, we went on to warn our followers in impending risks for the markets for the first half of 2022 when we published our first half 2022 outlook titled Curb Your Enthus.

Starting point is 00:04:55 I've discussed this tool in more detail in prior videos and podcast releases over the last four years. Today, I'm pretty confident in saying that levels much above 5,000 on cash S&P 500 won't be achieved in the first half of 2024, and if they are, they won't be sustained for long. Why? While spot volatility of the VIX index is not traded, it doesn't mean that it's not useful number in some manner. Many academic studies have proven that it, by itself, is not a predictive tool on its own right. own right. However, short of that one year that many investors long for again, 2017, which was the Trump tax cut anomaly, history has said that the Spot VIX Index doesn't calculate much below a level of

Starting point is 00:05:36 12 for very long. Here's a multi-year chart of the Spot Volatility Index, the VIX Index. Using this metric, using prior cycles of Federal Reserve interest rate moves, using yield curves and investor sentiment, one can triangulate forward potential cash S&P 500 levels under both calm, and distressed or highly volatile market conditions. In advance of the rally of 2003, our investment team used our knowledge of volatility combined with our research into presidential election cycles discussing how the fourth quarter of the second year through the first half of the fourth year was the sweet spot for investment returns historically. A second thing we discussed was

Starting point is 00:06:14 Federal Reserve interest rate hiking cycles and how stocks are performed during each stage between the raise, the pause, and the lowering of short-term interest rates. The third thing we discussed in our forecast was investor sentiment, hedge fund and retail investor positioning, and stock market breadth cycles, and how they can create positive expected return profiles for the markets when investors are positioned extremely bearishly, as they were at the end of 2022. And then they flip positive over the next 12 to 15 months. For now, our first half outlook for 2024 remains, as it has been alluded to for almost a year. That's the first quarter of 2024 should usher in a year of heightened volatility. This volatility should present itself almost

Starting point is 00:06:55 immediately in the first few weeks of the year and continue throughout the first half at 2024. That's the bad news. The good news, new all-time highs in the S&P 500 are likely in the first half, most likely in the late first quarter with the S&P 500 potentially reaching 5,000. That level is not inconceivable at all, just more of the old normal returning to the equity markets for 2,000. However, can we exceed and sustain levels above 5,000 on the cash S&P 500 for the first half at 2024? Well, investors, I'm sorry to say, and no, I'm not going to sing it because we'd lose subscribers to this channel.

Starting point is 00:07:34 I can't get there from here. This is why our investment team believes that more active and tactical investing in trading strategies versus buy and hold ones will likely be a better way to invest for a number of years. Stay tuned for more on that topic in the coming weeks and months ahead. for myself, from Charles, from James, from the rest of the investment management team, and the whole family here at Oak Harvest, have a blessed weekend. All content contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes only.

Starting point is 00:08:04 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 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

Starting point is 00:08:42 will not apply to all client portfolios. Investing involves the risk of loss, and past performance is not indicative of future results.

Stock Talk - Goldilocks Meets Volatility: Decoding 1H2024 S&P 500 Predictions

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