Published January 5, 2024
We begin 2024 with a broad overview of the stock market, its cycles, and return averages as presented by the Visual Capitalist. The first chart looks at stock market returns over the past six decades, noting by the orange bars and dots bearish market periods with bullish periods in blue.
The box at the bottom notes that bullish periods tend to be quite long (51 months) punctuated by brief, sharp bearish spikes downward lasting 11 months, on average.
Since the bearish periods are brief, they appear almost insignificant on this chart. However, their damage is long-lasting. It takes a +50% gain to offset a -33% decline. Thus, we spend much of the first year or two of a new bull phase simply recouping our losses from the bearish period. For that reason, we try to limit our exposure to those bearish periods, preserve our capital, and use the bullish periods to build wealth.
2023 was supposed to be a tough year for stocks. Almost all economists predicted a recession.
However, consumers shrugged off higher interest rates, and investors were more optimistic than fearful largely due to exuberance around AI. As a result, the S&P 500 rallied over 24% in 2023.
Driving the S&P 500’s returns in 2023 was the force of the “Magnificent Seven”.
These mega caps include Amazon, Apple, Nvidia, Tesla, Microsoft, Meta, and Alphabet. Together, they generated the lion’s share of the index’s returns.
By contrast, a record 72% of stocks underperformed the S&P 500 index. Overall, 2023’s stock market returns were not only rare, but comparatively quite strong. To put these gains in perspective, the table below shows annual returns for the S&P 500 since 1874. Like a bell curve, the majority of returns fall near the middle, with the highest number of returns in the 10% to 20% range. We see that stocks end up positive most years – almost 2/3rds of the time. Severe annual losses are rare (about 7% of the time), but their damage can be substantial as noted above.
Forecasting S&P 500 Returns for 2024
Looking back at 2023, we can see that Wall Street’s consensus was far off the mark.
“I’ve never seen the consensus as wrong as it was in 2023.”
-Andrew Pease, Chief Investment Strategist at Russell Investments
While many firms were cautious with their forecasts going into 2023, Goldman Sachs was one of the few to say the economy would avoid a recession.
Among the main reasons behind this forecast was that real disposable personal income was rebounding and U.S. GDP looked resilient in late 2022. These factors, among others, were seen to be more powerful drivers than tighter financial conditions.
This year, Goldman Sachs estimates that the S&P 500 will see more moderate returns, rising 7%. Overall, analysts forecast that the index will return 5-10%, presenting another cautiously optimistic outlook for 2024.
We know that whatever the ultimate return, the market will be messy. The following chart from JP Morgan shows that it’s common for stocks to fall 15-20% or more during the course of the year (shown by the red dots). In some cases, as in the Covid year of 2020, stocks fully recoup massive losses by year’s end.
Of course, very few investors have the stomach for such a rollercoaster, preferring to manage that downside exposure in some form.
That desire is how TimingCube came to be over 20 years ago. We still seek to mitigate the damage of bearish market periods, remove the emotions that drive us to poor investment decisions, and come out ahead having followed a steadier path. We hope to have a great 2024!
Market Update
After a strong nine week run to finish 2023, investors began the new year with a major shift in sector allocations. The hotshots of the 2023 market were sold with money flowing into the 2023 laggards of energy, healthcare, and utilities. The broad market, overweighted with tech/consumer shares, slipped -0.6% while the Nasdaq lost more than twice that. Another -0.7% drop Wednesday and -0.3% dip Thursday as the rotation continued. Friday brought the first jobs report of the year showing strong gains in hiring. Stocks initially moved higher on the news before ending flat on the day as interest rates rose on the strong economic report.
The first losing week in ten sent the S&P 500 (SPY) lower by -1.55%. The tech/consumer-heavy Nasdaq 100 (QQQ) fell -3.12%. Smallcap stocks (IWM) tumbled -3.72%.
Warm wishes and until next week.