Today, everyone’s a bit more optimistic. Many economists expect continued growth, albeit slower growth. Those who warn of recession add that any downturn is likely to be short and shallow. Meanwhile, market strategists are looking for average stock returns.
Let’s take a closer look at the big stories driving these 2024 forecasts.
This cooling trend is echoed in the falling level of job openings.
According to the BLS’s Job Openings and Labor Turnover Survey, employers had 8.73 million job openings in October, down from the March 2022 high of 12.03 million.
The ratio of job openings relative to the number of unemployed people is near prepandemic levels. (Source: FRED via TKer)
During the month, there were 6.50 million unemployed people — meaning there were 1.3 job openings per unemployed person. This ratio — one of the most obvious signs of excess demand for labor — is almost back to down to prepandemic levels.
While it is true that the level of job openings remains high, it’s nowhere near its level earlier in the economic recovery. In other words, labor demand isn’t as hot as it used to be.
Workers prepare to lift a new pedestrian bridge into place at the Stamford Transportation Center on August 26, 2023 in Stamford, Connecticut. (Photo by John Moore/Getty Images) ·John Moore via Getty Images
Importantly, the core PCE price index — the Federal Reserve’s preferred inflation gauge — is hovering near the central bank’s target 2% level.
According to BEA data, the core PCE price index rose by just 0.1% month over month in November. On a six-month annualized basis, that metric is at a very comfortable 1.9%.
The Fed’s preferred measure of inflation is at target levels. (Source: BEA via @RenMacLLC)
While it’s great news that inflation rates are near target levels, Fed Chair Jerome Powell has made clear that he’d like to see those rates stay there for more than just a few months before declaring any kind of victory.
With inflation rates near target levels, most agree that monetary policy doesn’t need to be tightened further. In fact, most experts, including many central bankers think the Fed will actually begin to cut interest rates in 2024.
The Fed spent much of the past two years hiking rates. Are rate cuts near? (Source: FRED via TKer)
Generally speaking, looser monetary policy would be good news for the financial markets. However, there’s also the possibility that future rate cuts are a response to significant deterioration in economic data, which would be bad news.
Of course, any actual decision to cut rates will depend on the direction of the incoming economic data including data on growth and inflation.
One of the most fascinating economic developments of the past three years is the resilience in consumer spending despite a major deterioration in consumer sentiment.
While the “vibes” have been negative, this bullish contradiction has generally been positive for economic activity, corporate profits, and stock prices.
Sentiment is improving. (Source: University of Michigan via TKer)
From the University of Michigan: “Consumer sentiment soared 13% in December, erasing all declines from the previous four months, primarily on the basis of improvements in the expected trajectory of inflation.“
From the Conference Board: “December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market, and personal income prospects over the next six months.“
But the normalization has also meant deterioration in metrics like debt delinquencies. And it could eventually mean a more meaningful increase in the unemployment rate, which currently sits at unusually low levels.
At 3.7%, the unemployment rate is near its 50-year lows. (Source: FRED via TKer)
It’s probably premature to sound alarms, especially considering the financial strength of U.S. consumers. (More here, here, here, here, and here.)
U.S. household finances continue to be very healthy. (Source: FRED via TKer)
Nevertheless, it’s always prudent to at least consider the possibility that growth will plateau and perhaps turn negative in the coming months.
Similar to how most homeowners locked in their mortgages at very low rates, large corporations did a lot of refinancing in recent years, locking in low interest rates before borrowing costs surged.
As a result of these activities, nearly half of S&P 500 debt is set to mature after 2030, and interest expenses haven’t really budged amid elevated rates.
As the bottom line, earnings will be sensitive to almost every other big story we’ve discussed above. Economic strength will be reflected in sales. Inflation will affect nominal sales as well as costs. And profit margins will determine how much of those sales hit the bottom line.
Most companies usually report quarterly earnings that beat analysts’ estimates. (Source: Deutsche Bank via TKer)
There are two things to remember when it comes to earnings estimates as 2024 unfolds: 1) Analysts typically cut their earnings estimates going into quarterly earnings season, and 2) most companies beat analysts’ quarterly earnings estimates.
Even metrics like earnings growth and the forward P/E ratio, regardless of whether they are high or low, have a very weak relationship with the next-12 month’s market performance.
There are tons of charts and stats I could share showing why the odds favor the bulls.
For now, I’ll share two from Carson Group’s Ryan Detrick.
First: “[S]tocks have been higher during an election year of a new President going back to the past 10 Presidents! Even the historically strong pre-election year can’t say that. Higher the past 10 times and up 12.2% on average isn’t anything to ignore and that is inline with a potential low double-digit return in 2024.“
President Biden’s fourth year could be a positive one. (Source: Carson Group)
Second: “[W]hen 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.
The second year of this market rebound could be a good one. (Source: Carson Group)
Oppenheimer’s Ari Wald had another two fascinating stats.
First: “Looking at bull cycles following a recessionary vs. non-recessionary bear, we’ve found the latter are usually steadier (lower year-1 returns followed by higher year-2 returns) and last just as long (median=32 months). The 37% gain since Oct. 2022 is on par with typical returns following a non-recessionary reset, and the median return between months 15 and 27 (Dec. 2023 to Dec. 2024) has been 13% which is the basis for our expectation for S&P 5,400.“
Stocks typically go higher after what we just experienced. (Source: Oppenheimer)
Second: “2024 will mark the 11th time since 1928 when the S&P 500 ended the prior year with a gain and was still flat-to-negative over a two-year period, indicative of positive momentum developing within a longer-term reset in price. In the ensuing year, the S&P 500 posted a median gain of 12.5% and traded positively 9 out of 10 times (90%). These returns are consistent with a year-2 bull cycle.“
Stocks usually go higher after a flat two years. (Source: Oppenheimer)
I think it goes without saying that there are no sure things in life and the stock market. Just because something usually happens does not mean it always happens.
That said, we shouldn’t be surprised if the stock market does what it usually does.
TKer published Wall Street’s 2024 outlook for stocks on Dec. 3 when the S&P 500 was just below 4,600. At the time, the mean and median target year-end targets for the index was 4,800, implying about a 4% return.
But the S&P is now trading at around 4,770, implying about a 5% return.
Most strategists see the S&P 500 going to 5,000 or higher. (Source: TKer)
Unless there’s a big deterioration in stock prices and their fundamentals in the coming weeks, expect Wall Street strategists to revise their targets higher, as they generally like to forecast 8%-10% gains in prices on rolling 12-month bases.
Having said all that, as I always say, predicting the stock market over one-year periods is incredibly difficult.
While there’s uncertainty about all the big talked-about stories — including the stories above — it’s the stuff that we’re not talking about that seemingly emerges out of nowhere that tends to be most destabilizing to markets.
Will there be a big unexpected event in 2024 that sends shockwaves through the economy and markets? Unfortunately, we’ll only know in hindsight.
