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SUMMARY
- In ’24 we don’t believe the bull market in stocks will end
- Market positives: An easier Fed and solid corporate earnings
- Headwinds: Higher starting valuations and election uncertainties
RiverFront is proud to release our 2024 Outlook, entitled ‘Tap-Dancing on a Tightrope’. Our Outlook is a visual chart pack designed to walk investors through our investment views and predictions for the upcoming year. In today’s Weekly View, we created a concise synopsis of the Outlook’s conclusions, along with a few selected visuals that encapsulate a number of key takeaways.
In 2024 we believe the Fed will try to ‘tap dance on a tightrope’, balancing between keeping monetary policy sufficiently restrictive to tame inflation… but loose enough to keep the economy afloat. This tightrope walk will lead to ‘mood swings’ as the market continually recalibrates its views on rates… but ultimately, we think it will be a profitable year for investors.
Next 12 Months Outlook: ‘Tap-Dancing on a Tightrope’ Ultimately a Profitable Exercise for Investors
- We don’t believe the bull market in stocks is over…but we expect lower returns from here due to valuation (see scenario forecast table, below).
- Recession risk in 2024 is under 50%, in our view: We believe the US economy is much stronger than international economies.
- Market positives as we look into ‘24 include a Fed that is at the end of hiking cycle, and solid potential for corporate earnings growth.
- Headwinds for the market include stock valuation relative to interest rates and uncertainties ahead of the US Presidential election.
Modest Upside for Stocks & Bonds in ‘Base Case’ Scenario
We place a 50% probability on our ‘Base Case’ scenario playing out next year – twice as high a probability as either our Bull or Bear cases. In our Base Case, stocks have a positive year due to growing corporate earnings (Chart 1, below), but upside is capped in the single-digit range by stock valuations that are close to a ceiling, in our view, especially relative to fixed income alternatives (Chart 2, below). Sticking true to a typical presidential election year, we expect the 1st half of the year to be range bound and volatile, before finishing 2024 strong (Chart 3, below). Multi-year bond price weakness sets up attractive risk-adjusted returns for fixed income & balanced portfolios, in our view (Chart 4, below).
Chart 1: S&P 500 Corporate Earnings Look Solid for 2024, in Our View; Uptrend Has Resumed
The Conference Board’s Leading Economic Indicator index (LEI) has historically been highly correlated with inflection points in US stocks’ corporate earnings per share about 3 months later, in our view.
The recent upturn in the LEI (green line in chart to the right) suggests to us that S&P 500 Earnings Per Share (blue line in the chart to the right) are stabilizing, and possibly even improving.
Chart 2: Stocks Can Grow from Here with Earnings, but Valuations Relative to Rates Caps Upside
Higher yields on government bonds are providing balanced investors a choice again.
While the earnings yield on the S&P 500 is no longer a lot more attractive than bond yields, we still believe stocks are reasonably valued if earnings can continue to grow.
Chart 3: Election Cycle Suggests To Us Volatility into Second Half of the Year
The chart below, courtesy of NDR Research, follows the trend in the Dow Jones Industrials over a four-year presidential cycle from 1900-2022. One historical pattern that emerges is ‘pre-election jitters’: following a strong first half of the 3rd year of a Presidency, the last quarter of that year and the first half of the election year tend to be volatile and range-bound (red box on chart below).
Encouragingly, there has also been a significant upward trend in the second half of an election year, as markets crave the certainty that election results bring (green box on chart below). We expect 2024 to be similar to history in this regard.
Chart 4: Bonds: Poised to be the Comeback Kid, in Our View
At current yields, we like bonds, especially on a risk-adjusted basis. Yields are now outpacing inflation, offering investors positive real returns again.
The period from 2021-2023 (year-to-date, through 10.31.2023) represents one of the worst government bond markets in history (see yellow bars on chart below). However, we expect bond returns to improve going forward.
Analyzing the worst decile of 30-year Treasury returns from 1942-2020 (table & red bars on chart below) shows the subsequent 5-year cumulative forward returns from those starting points have been positive. We expect history to repeat itself here.
Portfolio Views and Positioning: Continue to Focus on Consistent Cash Flow and Dividends/Coupons
In our Base Case, we expect the following selection themes to play out:
- Prefer US stocks to International: We favor the US over international, given geographic and demographic advantages, stronger margins;
- Within the US, we favor consistent cash flow generators in areas like technology and energy
- International Equities: Still waiting for proof of sustainable earnings rebound
- Developed Markets: European, Asian economies weaker than US; Focus on ‘wide-moat’ business models
- Emerging Markets: Underweight - Remain skeptical on China economy
- Fixed Income: Fed easing, will look to opportunistically add
Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.