Welcome to my stock market forecast and economic predictions for 2024. Below you’ll find my 2023 Wrap-up and 2024 Stock Market and Economic Forecast for 2024.
As 2023 comes to a close, the last 2 months have seen a huge short squeeze and short covering rally. The stocks that have been the best performers of November and December’s massive 5 short squeezes have been among some of the worst performers of 2023. These stocks were sold and shorted hard from July to late October. They included cyclicals, meme stocks, unprofitable technology stocks, airlines, homebuilders, retail, biotechs and more. By the end of October, after 3 months of the market trending down (from late July), Small Cap Russell 2000, the NYSE and the Equal Weight S&P-500 Index were all red for the year. Hedge Funds were extremely bearish and held the largest short position in history of Goldman Sachs’s hedge fund flow records (going back to 2010). That set hedge funds up for a massive short squeeze as investor sentiment was deeply pessimistic and overly bearish, which is often a contrarian signal. When there are too many investors all crowded into the same positions, there’s often a reversal. It’s like too many people on one side of a boat and the boat capsizes.
After 5 monster short squeezes in 7 weeks in the last 2 months of 2023 — 3 of which would qualify for the largest short squeeze in years on their own — hedge funds had blown their year-to-date gains, getting caught offsides in 5 massive short squeezes, going against their short positions and sustaining heavy losses. Then in mid-December, the Federal Reserve and Fed chair Powell made the dovish pivot that I expected before the end of 2023 as part of my “Three Phases Forecast”…
- Phase I – The market rallies on peak inflation and peak Fed hawkishness. This has been the rally from October 2022’s bear market lows through present.
- Phase II – The market — starting with fixed income and commodities, then stocks — goes from focusing on inflation, to focusing on the effect of fighting inflation (raising interest rates) which is recession. We already saw the first signs of Phase II dynamics starting July this year, exactly when they were forecast more than a year in advance, and now we see the very clear signals of Phase II dynamics ever since the December 13th, 2023 FOMC. One of the key dynamic shifts has been a strong negative correlation between rates and stocks that has been in effect and leading the stock market since March of 2022 when the Fed first started hiking rates, to that correlation flipping back to its historical norm (positive). That’s happened for the first time in early 2 years over just the last 2 weeks. Phase II starts with a change in focus, but ends with an economic recession and a bear market in stocks. However, there are other asset classes that I believe are going to enter bull markets during this phase.
- Phase III – This is the time that no one will want to own stocks after a bear market and likely ongoing economic recession, but this period will offer great opportunities to buy stocks at deep discounts as the economy enters a new expansion phase and stocks enter a new bull market. You don’t want to miss this phase as this can be a once or twice in a lifetime opportunity.
After the Fed’s dovish pivot, the stock market rallied more as it almost always does when the Fed surprises dovishly. As a result, those same hedge funds began buying all of the stocks they had been short in a momentum play to try to save their year with the few weeks they had left.
This has left the S&P-500 ending 2023 just off record highs, but like late October’s extreme bearish sentiment that was a contrarian signal, the market is now extremely bullish and frothy…another contrarian signal that too many investors and traders are leaning heavily to one side of the boat and its now at risk of capsizing.
Many investors now believe that the economy will slide by unscathed from a massive Fed rate hiking cycle which took the Fed Funds Rate from 0% to 5.25% to 5.5% in less than 2 years. Investors are doing what they always do and linearly extrapolating recent price trend expectations. In other words, the market has done nothing but go up for 2 months, and then throw in, “New record high” headlines driving FOMO (Fear Of Missing Out) and investors recency bias kicks into overdrive. Investors and traders can’t imagine a market that could possibly go done meaningfully from here, just as they couldn’t see the market possibly going up in late October after 3 months of a steady downtrend.
I leave emotions out of my analysis and look at probabilities. It doesn’t matter to me where the probabilities lead… bullish or bearish, it just matters that our tribe is o the right side of the market and in the right assets.
What are the probabilities saying for 2024?
- For the Economy – The yield curve is forecasting an economic recession, most likely to start in 2024. The inverted yield curve has accurately predicted every U.S. recession since World War II; and the yield curve recently reached the most inverted in four decades. While an inverted yield curve is a warning of economic recession, it’s actually sharp steepening of the curve after inversion that’s the red flag that a recession is imminent. Ironically, we didn’t have the conditions for that sharp curve steepening until the December FOMC when the Fed made their Dovish Pivot. It’s Fed rate cuts that steepen the curve after inversion that leads right into recession like clockwork, over and over again throughout history. While the stock market rallied on the dovish Fed pivot in December, as it always does throughout history, investors didn’t realize that this is actually NOT good news. I’ll show you why in the video below.
- For the Stock Market – Did you know that the S&P has never put in a bottom or low BEFORE the onset of recession? That means that if a recession is highly likely in 2024, so are new S&P price lows (which I’d define as below the lows of 2022’s bear market).
This analysis isn’t based on my opinions, feelings or what I’d like to see happen. I certainly don’t want to see a painful economic recession. These are historical probabilities and very highly reliable probabilities. As I’ll show you in the video below, these are some of the most reliable cycles, signals and probabilities in all of finance. I’ll show you them and you can decide for yourself. Or yo can use this information as a starting point for your own additional research.
If all of this turns out to be true — and probabilities say that it’s very likely — then a lot of very bullish investors right now will be caught wrong-footed and offsides, and likely in the first half of 2024 — again, according to probabilities.
The market offers a lot of advantages and probabilities. Some investors and traders want to believe what they want to believe o matter what they are presented, but are they basing their opinions in facts or probabilities? I don’t like to guess when it comes to my analysis. The only thing we have to beat the market are, probabilities, so we use those to our advantage. Some investors and traders are open to this information. Some simply aren’t. Our tribe is filled with open-minded individuals who’s only goal is to beat the market and enhance their financial lives.
I’ll cover most of what I talk about above (and more) in the video below. The new year of 2024 will provide some amazing trading and investing opportunities, so long as you are in the right stocks and assets and on the right side of the trend.
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Enjoy the video and Happy New Year!