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2023: Predicting is Futile, Interpreting is Priceless
Like most years on Wall Street, no one could have predicted what would occur on Wall Street in 2023. After a brutal beatdown in 2022, tech stormed back, with the tech-heavy Nasdaq 100 ETF ((QQQ - Free Report) ) rising 49% for the year (so far). Meanwhile, two significant wars broke out, the U.S. narrowly avoided a regional banking crisis, the Federal Reserve hiked rates rapidly, and inflation finally came down to earth. Though each part of the market and news cycle is not worth trying to predict, by interpreting the information we have available and studying historical data, we can accurately diagnose the direction of where the market will likely head in 2024, and that’s what matters.
For example, if you simply followed historical seasonality trends in 2023, you likely outperformed 99% of investors. For 2024, the four-year presidential suggests that performance will align with historical norms. In the average election year, equities tend to fall in January and February before bottoming in March. Typically, the Dow Jones Industrial Average finishes election year cycles higher by approximately 8%.
Image Source: Equity Clock
Beyond seasonality, there are strong bullish currents below the surface. If the five trends below continue (I believe they will), stocks should be higher in 2024. Here they are:
Rotation, A Feature Not a Bug: Small Caps & Biotech Stocks Rise from the Dead
Bull markets with narrow participation are unsustainable. For much of 2023, a key bear argument has been that price strength has been consolidated to mega-cap tech stocks within the “Magnificent 7”, such as Nvidia ((NVDA - Free Report) ) and Meta Platforms ((META - Free Report) ). Like a successful relay racing team, the big cap stocks will have to eventually rest and pass the baton while other stocks will need to step up.
As of late, this is precisely what is occurring - beaten-down market areas, such as small caps and biotech stocks, are beginning to take show strength. Biotech stocks are being lifted by M&A in names like Immunogen (). Meanwhile, breakthroughs in areas like fat loss drugs and gene editing are diving stocks like Novo Nordisk ((NVO - Free Report) ) and CRISPR Therapeutics ((CRSP - Free Report) ) higher.At the same time,small caps arerebounding strongly amidst a weaker dollar and interest rate hike pause. Over the past two months, the Russell 2000 Index ETF ((IWM - Free Report) ) is up double-digits and has clawed back above its 200-day moving average – a bullish sign.
Image Source: TradingView
Follow the Money: Rates Not Likely to be “Higher for Longer”
The U.S. Federal Reserve is one of the liquidity providers and drivers of the market. One of the biggest debates on Wall Street right now is deciding whether or not to trust the Fed’s recent “hawkish” rhetoric or to trust the market regarding interest rates. In a recent talk, Fed Chairman Jerome Powell called discussion of rate cuts “premature.” However, the CME FedWatch tool, a tool that predicts future interest rates by analyzing the prices of federal funds futures contracts, gives a 74% chance that the Fed will ease rates in May 2024. Who should investors trust? When it comes to markets, always follow the money.Markets represent real money being put to work, while rhetoric can be empty and change on a dime.
Money on the Sideline: Nearly $6 trillion in Money Market Funds
A money market fund invests in low-risk securities to provide investors with a relatively stable, liquid investment option. Total money market fund assets increased by $61.65 billion to $5.90 trillion for the week ending December 6th. In other words, though stocks have been rallying, the unprecedented $5.90 trillion on the sidelines suggests that most investors have not participated in the gains, and there is still a ton of money on the sidelines to keep the bull flame lit.
No Contagion: Regional Banking Crisis Averted
Several regional banks that were unprepared and failed to hedge for rapidly rising interest rates failed in 2023, such as Silicon Valley Bank, Signature Bank, and First Republic Bank. However, bank failures have dried up recently, interest rates have stabilized, and investors are flocking to back to the Regional Banking ETF ((KRE - Free Report) ). After gaining more than 20% over the past two months, KRE retook its 200-day moving average for the first time since the crisis began. Banking strength is a key catalyst for bulls.
Image Source: TradingView
Geopolitical Front: Is the Worst Over?
Geopolitical upheavals are the most unpredictable aspect of markets. While two major wars going on now (Gaza & Ukraine), the market is beginning to price them in. Though the wars are devastating for the world, markets have little conscience. The more time passes, the more of a diminished impact these geopolitical issues should have on U.S. equity markets.
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5 Reasons to be Bullish into 2024
2023: Predicting is Futile, Interpreting is Priceless
Like most years on Wall Street, no one could have predicted what would occur on Wall Street in 2023. After a brutal beatdown in 2022, tech stormed back, with the tech-heavy Nasdaq 100 ETF ((QQQ - Free Report) ) rising 49% for the year (so far). Meanwhile, two significant wars broke out, the U.S. narrowly avoided a regional banking crisis, the Federal Reserve hiked rates rapidly, and inflation finally came down to earth. Though each part of the market and news cycle is not worth trying to predict, by interpreting the information we have available and studying historical data, we can accurately diagnose the direction of where the market will likely head in 2024, and that’s what matters.
For example, if you simply followed historical seasonality trends in 2023, you likely outperformed 99% of investors. For 2024, the four-year presidential suggests that performance will align with historical norms. In the average election year, equities tend to fall in January and February before bottoming in March. Typically, the Dow Jones Industrial Average finishes election year cycles higher by approximately 8%.
Image Source: Equity Clock
Beyond seasonality, there are strong bullish currents below the surface. If the five trends below continue (I believe they will), stocks should be higher in 2024. Here they are:
Rotation, A Feature Not a Bug: Small Caps & Biotech Stocks Rise from the Dead
Bull markets with narrow participation are unsustainable. For much of 2023, a key bear argument has been that price strength has been consolidated to mega-cap tech stocks within the “Magnificent 7”, such as Nvidia ((NVDA - Free Report) ) and Meta Platforms ((META - Free Report) ). Like a successful relay racing team, the big cap stocks will have to eventually rest and pass the baton while other stocks will need to step up.
As of late, this is precisely what is occurring - beaten-down market areas, such as small caps and biotech stocks, are beginning to take show strength. Biotech stocks are being lifted by M&A in names like Immunogen (). Meanwhile, breakthroughs in areas like fat loss drugs and gene editing are diving stocks like Novo Nordisk ((NVO - Free Report) ) and CRISPR Therapeutics ((CRSP - Free Report) ) higher.At the same time,small caps arerebounding strongly amidst a weaker dollar and interest rate hike pause. Over the past two months, the Russell 2000 Index ETF ((IWM - Free Report) ) is up double-digits and has clawed back above its 200-day moving average – a bullish sign.
Image Source: TradingView
Follow the Money: Rates Not Likely to be “Higher for Longer”
The U.S. Federal Reserve is one of the liquidity providers and drivers of the market. One of the biggest debates on Wall Street right now is deciding whether or not to trust the Fed’s recent “hawkish” rhetoric or to trust the market regarding interest rates. In a recent talk, Fed Chairman Jerome Powell called discussion of rate cuts “premature.” However, the CME FedWatch tool, a tool that predicts future interest rates by analyzing the prices of federal funds futures contracts, gives a 74% chance that the Fed will ease rates in May 2024. Who should investors trust? When it comes to markets, always follow the money. Markets represent real money being put to work, while rhetoric can be empty and change on a dime.
Money on the Sideline: Nearly $6 trillion in Money Market Funds
A money market fund invests in low-risk securities to provide investors with a relatively stable, liquid investment option. Total money market fund assets increased by $61.65 billion to $5.90 trillion for the week ending December 6th. In other words, though stocks have been rallying, the unprecedented $5.90 trillion on the sidelines suggests that most investors have not participated in the gains, and there is still a ton of money on the sidelines to keep the bull flame lit.
No Contagion: Regional Banking Crisis Averted
Several regional banks that were unprepared and failed to hedge for rapidly rising interest rates failed in 2023, such as Silicon Valley Bank, Signature Bank, and First Republic Bank. However, bank failures have dried up recently, interest rates have stabilized, and investors are flocking to back to the Regional Banking ETF ((KRE - Free Report) ). After gaining more than 20% over the past two months, KRE retook its 200-day moving average for the first time since the crisis began. Banking strength is a key catalyst for bulls.
Image Source: TradingView
Geopolitical Front: Is the Worst Over?
Geopolitical upheavals are the most unpredictable aspect of markets. While two major wars going on now (Gaza & Ukraine), the market is beginning to price them in. Though the wars are devastating for the world, markets have little conscience. The more time passes, the more of a diminished impact these geopolitical issues should have on U.S. equity markets.