Weekly Update

Next Year

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Published November 10, 2023


2024 Outlooks are starting to arrive. In the coming weeks we will take a look at a few of these forecasts. First, we will see what Delta Research sees in the year ahead.

“Generally, economic bad news is temporary while good news is more permanent. Recessions are measured in months while rising living standards are measured in decades and centuries. Bad news ebbs and flows. As a result, the market rises and falls in the intermediate and short-term. But over the long-term, the trend is higher as innovation, wealth creation and inflation lift valuations.
Below is a graph of U.S. household net worth over the past 35 years. Since Covid in the Spring of 2020, household net worth has climbed $41 trillion higher. This helps explain the market appreciation since Covid.

Household net worth

On January 3, 2022, the S&P 500 Index closed at an all-time high of 4796.56. At some point in the future, the S&P 500 will break this record and reach a new, all-time high. To reach the previous record, the S&P 500 has to appreciate by about 10% from its current level.

A case can be made that the all-time S&P 500 high record may be broken in 2024. Supporting factors for this outlook are:

1. No recession. U.S. growth in 2023 of 2.3% has been much higher than expected because of a strong consumer. The Federal Reserve and some leading investment banks are forecasting a low recession probability in 2024 and a continuation of positive GDP growth.

2. No recession. Real disposable income growth is expected to grow nearly 3% in 2024 from continued wage growth. If consumer spending remains strong (70% of GDP), recession risk is greatly reduced.

3. Inflation is abating. The 3-month rolling sequential rate of core goods inflation is currently about 3%, down from a peak of about 6.5%. Inflation is trending lower. There is a reasonable probability that core inflation growth reaches the Fed target rate of 2% by the end of next year.

Sequential core inflation

4. Rates flat to down. With inflation subsiding and growth slowing (but still positive) the Federal Reserve has room to cut rates if necessary. The Fed Funds futures are pricing in two Fed rate cuts next year.

5. Earnings up. Consensus analyst estimates show S&P 500 earnings growth from 2023 to 2024 of roughly 12%. With no change to the P/E of the S&P 500, the market can reach a new record high on earnings growth.

6. Money Supply returns to trend. The 10-year and 20-year average growth rate of the money supply was 6.1% before March 2020. In response to the pandemic, M2 grew on average at 14.4% to its peak in July 2022 to $21.7T. Since the peak, M2 has declined 4.4% to $20.7T – the latest reading (Sept 2023). We are not too far from trend and a return to money supply growing again.

Money supply M2

7. 677 days of drawdown. Through today, the S&P 500 has been below its all-time high for the past 677 days. At the low last October (3491.58 on October 13, 2022), the S&P 500 was down by about 25%. Since 1950, there have been 4 instances of the S&P 500 being down between 20-30% before returning to a high. The average duration of the drawdown was 442 days. The average days to recover was 182 days. Since the S&P 500 low on October 13, 2022, we are now at 394 days without having recovered. Even in cases when the S&P 500 was down between 30-40% (NASDAQ down by about 36% in the current cycle), the days to recovery averaged 322. Drawdowns do not last forever and history suggests we are closer to the end of this drawdown rather than the beginning.

S&P 500 Drawdons 1950 - 2023

From January 2010 until January 2023, the annualized S&P 500 return without dividends has been 10%. During these years, the U.S. economy has been recession free (excluding the several months in 2020 when the economy was closed and recession was declared). During non-recessionary years, investors should expect to enjoy positive returns in the S&P 500.

Since 2020, market forecasts have been largely inaccurate. The financial distortions of the Covid response have dislocated many leading indicators including the inversion of the yield curve and the Leading Economic Index (LEI). These two long-standing indicators continue to signal recession in 2024. For our bullish case to prove out, we should see the yield curve regain a positive slope and the LEI turn positive over the coming months.”


Market Update

Investors hoped last week’s strong rebound was the beginning of a change in tone for the stock market. Interest rates may have peaked at the recent 5% level, or so last week’s market rebound hoped. Monday brought little change but a 7th consecutive gain for the Nasdaq. The tech/consumer-heavy index made it eight straight Tuesday with a solid +0.9% gain as the powerful “Magnificent Seven” stocks pushed higher. One of those, Microsoft, notched an all-time high as investors bet on the company’s AI technology. Another positive market Wednesday though gains were a slim +0.1%. A weak U.S. Treasury bond auction and Fed Chair Powell’s cautious words brought the market rally to a halt Thursday, leaving the S&P 500 down -0.8%. But the dip immediately found buyers Friday, especially of the Nasdaq’s hot shares. The Index closed the day higher by +2.25%, its best move of the week as investors continued returning to the megacap stocks that have led the market this year. Semiconductor stocks roared ahead by +4% to push the month’s gain to +13% in only eight trading sessions. Earnings were all over the place this week with some companies hit hard while other beaten-down stocks surged on better-than-expected results. Overall earnings have been strong this quarter posting their biggest year-on-year gain in over mirroring the economy’s strong third quarter growth rate. However, oil stocks, market darlings the past two months as tech stocks suffered are seeing money rotate back out quickly as oil prices have slumped on concerns about China’s economy. This despite robust earnings reports from the sector.

With interest rates unable to rebound from last week’s drubbing, stocks posted solid gains this week. The S&P 500 (SPY) rose +1.36% with all the gains occurring in Friday’s session. The Nasdaq 100 (QQQ) did better with a +2.90% rise. Smallcap stocks (IWM) showed how thin market leadership really is with a -3.08% loss this week while the large-cap tech stocks gained. Indeed, the tech sector was the only one to beat the broad market this week with about half of the market’s sectors posting weekly losses.

Warm wishes and until next week.