We Were Right About The Market Last Year, What Will 2024 Bring?

We bought the market proper in 2023. The truth is, we referred to as the underside within the Nasdaq on January 6^th with the article that we wrote. As we prepare to start a brand new buying and selling yr, what are we predicting for 2024?

Throughout my 24 years as knowledgeable cash supervisor, it has been a really uncommon prevalence to see two consecutive years available in the market which might be alike. This previous yr available in the market (2023) that we simply completed was virtually completely reverse to the earlier yr (2022).

Moreover, I’d be very shocked if this coming yr (2024) will find yourself very similar to final yr (2023). On this article, I’ll clarify the rationale why I consider this, and what an investor can do now to organize for one more distinctive and difficult yr available in the market forward.

The one-year chart of the Nasdaq proven beneath is what the Nasdaq regarded like one yr in the past.

At that time limit, it was within the midst of a 33% drubbing in 2022 triggered principally by a really hawkish Fed that drove rates of interest a lot larger. See the chart beneath:

On account of an enormous rise in rates of interest, multiples (P/E ratios) available in the market contracted by about 33% and the upper P/E Nasdaq felt it essentially the most.

Whereas rates of interest went larger and the multiples contracted, earnings expectations remained about the identical. The sell-off in equities was not due to earnings contraction, it was due to a number of contraction.

Lengthy-duration shares and bonds have been the worst locations to be in 2022 because the rising rate of interest storm was raging. However you have been advised by asset allocators “{that a} 70-year-old ought to have 70% of their portfolio in bonds.”

Not in a rising rate of interest surroundings! Asset allocation ought to be based mostly on extra than simply your age. For me, the present market local weather is an much more essential consideration.

The rising rate of interest surroundings that was effectively signaled by the Fed in 2022 additionally devastated long-term bond portfolios. The longer the time period of a inventory or a bond, the extra weak it’s throughout a rising rate of interest surroundings.

The chart beneath exhibits the steep drop within the worth of U.S. long-duration treasuries throughout 2022 as represented by the ETF TLT. This ETF was down a whopping 33% throughout that yr.

Whereas TLT was getting slammed, the inverse model of this ETF was hovering. Take into account that it’s also leveraged 2:1. It was up 92.4% in 2022. We used it as a hedge towards our particular person bond portfolio.

How unhealthy was the sell-off in U.S. treasuries that yr?

The late, nice Silicon Valley financial institution folded as a result of it had a big portfolio in its reserves of long-term U.S. treasuries. You’ll assume a big financial institution like that might know higher.

Apparently, they didn’t think about the market local weather that was coming. It was time to get off the long-duration tracks earlier than one would get run over by the prepare being pushed by Jerome Powell.

A lot for the 70-30 rule for seventy-year-old retirees.

No person was in a worse place firstly of 2022 than Cathie Wooden along with her very long-duration portfolios. By the tip of the yr, her flagship fund ARKK was down a gut-wrenching 67%! That’s two-thirds of your holdings worn out.

Apparently sufficient, her ARKK fund was up 67% this previous yr (2023), nevertheless it nonetheless sports activities a two-year drop of 45%! That’s proper. $100,000 would have turn out to be $33,000 in 2022. With a 67% achieve in 2023, your stability can be again to only $55,000, effectively beneath your start line in 2022.

However as 2022 got here to a detailed, the market began to backside out (evaluation the chart firstly of this text of the Nasdaq from one yr in the past as soon as once more). You may clearly see from that chart that the Nasdaq started to construct a backside in late October-November of that yr (2022).

By January 6, 2023, we have been satisfied that the Nasdaq had bottomed out. We even caught our neck on the road and proclaimed it in that article that I beforehand talked about.

We started going all in on massive tech shares at the moment. Happily, that was the place one of the best place to be in 2023. Seventeen days after we proclaimed a backside within the Nasdaq, we wrote an article about lots of the massive tech shares that have been breaking out on the time.

I personally take a look at about 1,000 inventory charts a day. I’ve completed this virtually each market day for the final 24 years. I take a look at these shares that we personal and people which might be displaying up as top-ranked shares in my database of over 5,000 shares which might be based mostly on Worth and Momentum.

Lots of the shares that we talked about within the article grew to become our core place at the moment and went on to turn out to be a few of the greatest winners of final yr.

The Nasdaq closed the yr with a 43.4% achieve. A lot of the greatest winners of 2023 additionally occurred to be mega-cap shares, which I deem to be $150 billion or extra in market capitalization. A consultant mega-cap ETF like MGK was up virtually 51% for the yr.

Excessive P/E ratio mega-caps significantly outperformed decrease P/E ratio small shares in 2023.

A lot of the motion in 2023 was centered in shares like Nvidia (NVDA), Microsoft (MSFT), Superior Micro Gadgets (AMD), Google (GOOG) (GOOGL), Meta Platforms (FB), Tesla (TSLA), and Amazon (AMZN). We wrote about AMD in an article that was revealed on Could 10^th of final yr. AMD was up 127.6% in 2023. We nonetheless personal it, however we’re lightening up and placing in hedges towards massive tech.

We wrote about Nvidia on August 29^th of final yr after proudly owning it for a lot of the yr. I’d name Nvidia the inventory of the yr with its eye-popping achieve of 238.9% final yr. We nonetheless personal the inventory, however we have now trimmed again on the scale of our place, and we’re hedging towards it.

Click on to enlarge

The market did lastly start to unfold out (outdoors of the fabulous 7) to different neighborhoods late within the yr, nonetheless. Now, as we start 2024, that is the present one-year chart of the Nasdaq. It clearly shouldn’t be in a bottoming part prefer it was final yr. As an alternative, it’s closing in on its all-time excessive of round 16,200 and is extraordinarily “overbought” on the present time.

It has come a great distance in 2023! It actually took off in mid-October when the Fed lastly signaled their long-awaited pivot of elevating rates of interest to taking a look at possibly decreasing them a couple of instances in 2024. This information triggered the inventory and bond listed to blast off and end the yr with a bang!

Now, what’s going to 2024 deliver? It is not going to be as simple because it was in 2023. The shares that carried the market in 2023 are unlikely to hold the burden once more this yr. Along with this, the market is now manner overbought and P/E ratios have turn out to be prolonged, particularly amongst the main shares of final yr.

Some re-balancing can be the primary order of the day. Trimming again on positions which have turn out to be outsized because of their massive beneficial properties in 2023 can be a prudent transfer. Shares with massive beneficial properties could possibly be weak to profit-taking that was delayed till this new yr to place off capital beneficial properties taxes. January could possibly be very fascinating and difficult.

A contrarian strategy to the market can also be so as this yr. We now have not had a contrarian market in a few years. With mega-cap excessive P/E shares dominating the market in 2023, it might not shock me to see smaller and decrease P/E shares do effectively this coming yr.

Discover the latest technical breakout of this small-cap worth ETF. That is about as contrarian as one can get after a yr that was led by Mega-Cap development shares.

This might lastly be a yr the place worth (low P/E) trumps development (excessive P/E). We now have not seen this in a very long time, both. However as at all times, choice will likely be vital. There are a number of actually unhealthy worth shares, and there are quite a few very unhealthy small-cap shares. Low P/E ratios are one factor, high quality and development is one other.

Earnings may even be very vital in 2024. See the chart beneath for the present expectations.

These estimates are clearly topic to vary on a weekly foundation. As of now, the market is anticipating report earnings this coming yr and the yr after that. The present ahead P/E ratio for the S&P 500 is now up 20.8X, nonetheless. That is too wealthy for this present surroundings rate of interest surroundings that we’re in.

A ahead P/E ratio extra within the 17-19X vary can be extra acceptable. Is there any higher clarification for the bull market that has occurred from 2009 to the current than rising earnings? I don’t assume so.

The consensus 12-month value goal for the S&P 500 is round 5,100. With the S&P 500 at present virtually at 4,800 that doesn’t make for lots of upside potential going ahead. correction would make that quantity much more engaging, nonetheless.

In abstract:

2023 was an amazing yr available in the market if you happen to have been within the Mega-Cap tech shares. That is the place we have been principally parked all year long.

2024 appears to be a lot totally different than final yr.

Search for extra of a contrarian strategy this coming yr.

Beware of costly mega-caps early within the yr. We should always see some heavy profit-taking and rebalancing into cheaper and smaller shares.

Take your nutritional vitamins, keep tuned to our articles, and strap in your seat belt as 2024 could possibly be very fascinating.