WALL STREET GOT BURNED IN 2023 | CROUCH CONNECTION | JANUARY 2024 "ADV"

WALL STREET GOT BURNED IN 2023

Just one year ago almost all the strategists at Wall Street firms were forecasting a recession and a struggling stock market. According to Bloomberg News:

“Over at Morgan Stanley, Mike Wilson, the bearish stock strategist who was rapidly becoming a market darling, was predicting the S&P 500 Index was about to tumble. A few blocks away at Bank of America, Meghan Swiber and her colleagues were telling clients to prepare for a plunge in Treasury bond yields. And at Goldman Sachs, strategists including Kamakshya Trivedi were talking up Chinese assets as the economy there finally roared back from Covid lockdowns.”

Once again, the “consensus” was dead wrong. The S&P 500 finished up over 20% for the year and the Nasdaq index was up over 50%, driven primarily by seven stocks, now known as the “Magnificent Seven” (Apple, Microsoft, Amazon, Nvidia, Meta (formerly known as Facebook), Tesla and Google). I admit, there were some pullbacks along the way that tested the patience of us all, but again, patience paid off.

Another prediction that market watcher can’t seem to get right is regarding the Chinese economy. According to an Advisor Hub article:

“…strategists at Goldman, JPMorgan and elsewhere  were predicting China would help propel a rebound in emerging-market stocks. Instead, the world’s second biggest economy has faltered as a real-estate crisis deepened and fears of deflation grew. And rather than pile in, investors pulled out, sending Chinese stocks tumbling…”

Followers of the Crouch Connection know that we have been skeptical of a Chinese rebound anytime soon because of their real estate meltdown, and we have suggested that the inflationary pressure that a booming Chinese economy would add to the world’s problems is not imminent.

Our point is that the “experts” are often wrong, and even if one “expert” made a correct call and made himself or herself famous, they are like to get the next one wrong. Don’t get discouraged by the predictions in the media.

WHAT'S IN STORE FOR 2024?

Stephen Auth, the Chief Investment Officer at Federated Hermes Investments has become one of my favorite investment strategists in recent years because of his independent thinking and willingness to part from the crowd when he disagrees with them. He offered his 2024 calls this past week and among his predictions:

• “Inflation is down but not out.”  The post-Covid economy, for a variety of reasons, seems to us to be one that is structurally short of labor. And that probably presages several years of strong labor markets and strong wage gains that are…unlikely to bring inflation to 2%.

• "The Fed has paused but no way six cuts are coming this year. No way, no how.” Since the Fed does not like to be accused of influencing elections, they will probably avoid making an interest rate cut in their late July through November meetings (barring a crisis), so that leaves them just April, June, and December, at best.

• “The Magnificent Seven may be terrific companies for the long haul but are at best single-digit return stocks in 2024.”  The big seven drove the indexes to new highs in 2023 but, he says “stocks in sectors that were left behind in 2023 will have their year in the sun.”

• "The recession is behind us, not in front of us.”  He says we have already experienced recessions in several sectors of the economy (chip shortage in automotive industry, housing, regional banking) and most of those adjustments are behind us.

• “Value stocks look very valuable to us.” If we’re right about most of the above, the stocks that have been held back most of the year due to recession worries should finally show some life in 2024.

MOMENTUM IS A POWERFUL THING

Another highly respected market research firm that we like to factor into our decisions is SentimentTrader. The analysts at SentimentTrader, using years of experience and one of the most comprehensive databases in the business, provide daily reports on the market trends and the historical significance of many different market patterns.

Jason Goepfert, their Senior Research Analyst, titled his January 2nd report: “Internal momentum has reached escape velocity”. He went on saying, “Buying is so broad and persistent that it’s historic”. Citing several momentum indicators he says that this type of internal momentum has rarely, if ever, preceded negative medium to long-term returns. After these signals, the next couple of weeks were hit-and-miss, but medium- to long-term returns were exceptional, and there were no losses over the next year.

As you have probably noticed, we do not blindly follow anyone in this business, but as multiple analysts that we respect offer similar views on the market, our confidence goes up quickly.

Quite honestly, Raymond James’ economists and analysts are cautious about market prospects this year, because they believe we still might see a mild recession in 2024 (AGAIN the Wall Street consensus view), but that only tempers their view to a sluggish market, not a down market.

Mike Gibbs, RJ Lead Portfolio Manager, summarized:

“Elevated sentiment and economic weakness are potential risks over the coming year that may result in periods of short-term volatility. However, we remain positive on overall trends and view weakness as opportunity (particularly in the left-behind areas).”

WHAT ABOUT THE ELECTION?

We like the election year analysis of Ed Mills, Raymond James Washington Policy Analyst:

“We would not be surprised to see 2024 track traditional presidential election years, where there are pockets of weakness during periods of the greatest uncertainty, but a market rebound and renewed strength as we receive clarity on key issues.

The beginning of election years (January - March) historically sees negative market returns as the primary process - and associated political volatility - hits its peak. March remains an important inflection point in the electoral calendar, with 34 primary elections, including 16 states holding their primaries on Super Tuesday.

The period between March and October historically has seen positive returns as any remaining uncertainty over nominees should be resolved at the nomination conventions (in July and August).”

He explains that beyond the conventions markets have seen weakness ahead of Democratic victories and strength ahead of Republican victories.

BOTTOM LINE

Sum it up, and we believe we will see some short-term weakness in the market from time to time, but overall expect that we will have a very good year. Call us anytime you would like an update on our views…we enjoy those conversations! 

Sincerely,

Dave Crouch Kim Blackburn Kay O’Connell

Registered Principal Branch Operations Manager Financial Advisor

Financial Advisor

BUFFET QUOTE:

“The stock market is a device for transferring money from the impatient to the patient.”

WARREN BUFFETT

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