What Does Wall Street's Crystal Ball Show for 2024?

It's that time of the year again when Wall Street firms release their predictions for the following year. Naturally, these Wall Street Wizards are likely to revise their forecasts by mid-year, given the unpredictable nature of markets, particularly in the short term. Alas, consumers crave forecasts for the unpredictable and Wall Street is more than willing to meet that demand.

That being said, these forecasts can offer insights. In this article, let's explore 3 themes that are consistent across various 2024 outlooks and are relevant to your portfolios:

#1 U.S Stocks May Grind Higher or.... Fall A Lot

#2 Cash Worked in 2023 but Bonds are Likely Back

#3 Is the Market Underestimating Risks in 2024?

#1 U.S. Stocks May Grind Higher or.... Fall A Lot

The consensus among Wall Street Wizards suggests that the U.S. stock market will experience a gradual uptick, with gains in the low single digits. However, there is a notable downside risk if the following assumptions do not materialize as anticipated:

1. The Federal Reserve implements rate cuts of 50 - 75 basis points in 2024 and extends these measures into 2025.

2. Inflation maintains a downward trend.

3. Consumer strength is anticipated to moderate, but not to an extent that adversely affects corporate earnings.

It appears that the stock market has already factored in these assumptions. If everything unfolds according to the current expectations, U.S. stocks are likely to yield modest returns. However, there is a significant downside risk if:

1. The Federal Reserve opts to raise rates or implements rate cuts at a slower pace than anticipated.

2. Inflation takes an upward turn or remains stubbornly at 3%, exceeding the Federal Reserve's target of 2%.

3. Consumers begin to cut back on spending due to factors such as rising unemployment, higher interest rates, and diminished savings.

What Does This Mean for You:

1. Set expectations that U.S. stocks may not see the same level of increase as in 2023.

2. Recognize that the trend of a few stocks driving equity returns, as seen in 2023, may reverse, emphasizing the importance of diversification in 2024.

The following chart illustrates 2024 S&P 500 forecasts from various Wall Street institutions based on the S&P 500 value as of 12/20/2023.

Source: Yahoo Finance; Growth calculated using SP 500 value on 12/20/2023

#2 Cash Worked in 2023 but Bonds are Back

In 2023, holding cash or money market funds yielded a favorable return of 4 - 5%, often surpassing the yields of longer-dated bonds—a somewhat unusual occurrence. With the anticipation of declining interest rates, many Wall Street banks are recommending a shift from cash or money market investments back into longer-dated bonds.

While transitioning to longer-dated bonds may offer a comparatively lower yield in the immediate term, investors stand to benefit from securing these 4 - 5% yields before the anticipated decrease in interest rates. On the other hand, continuing to hold cash may result in a higher short-term yield, but if interest rates begin to decline, so will the overall yield on cash investments.

The consensus is that the Federal Reserve will initiate interest rate cuts in 2024 by 50-75 basis points. There are several plausible reasons for interest rates to decrease, such as the Fed implementing rate cuts and/or a potential recession. Conversely, the only clear scenario for rates to increase is if inflation reverses course, leading the Federal Reserve to continue hiking rates. However, higher rates may pose the risk of pushing the economy into a recession, eventually prompting a return to lower rates.

What Does This Mean for You:

1. If you strategically hold cash in your investment portfolio, you might consider reallocating a portion to longer-term bonds to lock in rates.

2. For those with Walmart DCMP accounts under the Fixed Rate Credit System, a nice return is expected—10 Year Treasury + 2.7%.

#3 Is the Market Underestimating Risks in 2024?

After reviewing these outlooks and observing market trends as a general follower of markets, it appears that prognosticators are grappling with reconciling the recent strong stock market performance with the relatively high-level risks looming in 2024. Many forecasts were issued in early November, predating a significant ~15% increase in the S&P 500, rendering them outdated before the start of the New Year.

Despite the stock market's impressive 25% gain in 2023 and a 14% surge since Halloween, there are notable risks that could trigger a pullback:

1. Possible Recession: Initial consensus for 2023 suggested an inevitable recession. However, the current sentiment heading into 2024 leans toward no recession or, at worst, a shallow one even as factors such as higher interest rates, rising unemployment, and lower savings may impact consumer spending.

2. Stock Market Valuation: While the S&P 500 exhibited strong performance, this was largely attributed to a small number of mega-cap growth stock. It remains to be seen if the broader index, beyond the standout performers, can sustain this momentum in 2024 and beyond.

3. Geopolitical and Political Risks: Ongoing events in Ukraine and Gaza, potential developments in Taiwan, and an upcoming U.S. Presidential election all contribute to geopolitical and political uncertainties.

While this may present a somewhat downbeat perspective, it's crucial to note that, as a long-term investor, market pullbacks can translate to opportunities to acquire stocks at more attractive valuations.

Remember, recessions and bull markets are inevitable aspects of market cycles. While the timing may be uncertain, being prepared to navigate through market downturns is an integral part of participating in the broader upward trend.

What Does This Mean for You:

1. Diversify Your Portfolio: Ensure your portfolio is diversified across various asset classes, sectors, and geographies to mitigate risks associated with specific market movements.

2. Focus on Controllable Factors: Concentrate on elements within your control, such as your savings rate, tax-minimization strategies, and your career—arguably one of your most valuable financial assets.

Wrap-Up

That is a wrap! Below are links to the 2024 market outlooks I have been reading. Happy Holidays!

1. JP Morgan - Market Outlook 2024 | J.P. Morgan Research​

2. Charles Schwab - 2024 Market Outlook: Widening the Lens​

3. Merrill Lynch - Economic Outlook 2024: Market and Investing Trends to Watch​

4. Goldman Sachs - The S&P 500 Index is forecast to return 6% in 2024​

5. Vanguard - Vanguard economic and market outlook for 2024: Global summary​

6. Morgan Stanley - 2024 Investment Outlook Threading the Needle

If you are interested in learning more about how Taurus Financial Planning may help as you navigate your personal finances, feel free to schedule an introductory call. Thanks for reading!

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