Is The Stock Market Risky in 2024?
While central banks are aiming for a soft landing, the monetary policies implemented over the past year have resulted in declines in business investment and housing activity. Consumer savings have diminished, and wage gains have plateaued. Ongoing geopolitical conflicts, such as the Russia-Ukraine war and unrest in the Middle East, continue to pose uncertainties and risks for the supply shock of critical commodities like energy, food, and semiconductors as we approach 2024.
In an attempt to cool down inflation, central banks are increasing interest rates, and financial institutions are raising savings rates. While certain banks, including Silicon Valley Bank and First Republic, have experienced bankruptcies, these were relatively small banks with a focus on niche markets. Surprisingly, investors are not deterred by these events, as indicated by the current extreme greed sentiment according to the Fear & Greed Index. However, the question remains: is this sentiment justified?
To assess the stock market’s status, we will analyze valuation metrics, macroeconomic indicators, company behavior, and investor sentiment.
1. Market Valuation
S&P 500 PE Ratio
The PE ratio, comparing a company’s earnings to its current stock valuation, has shown an uptick to 26.34 for companies in the S&P500. An increasing PE ratio suggests that companies are being valued more for their earning performance, potentially making the general market less appealing for investors.
Shiller PE Ratio
The Shiller PE ratio, or CAPE, has increased from 28.08 in October of last year to 32.26 now. This ratio focuses on the sustainability of the market’s earning power. The rise indicates a perception of the market’s earning power becoming less sustainable, though historically, a high CAPE has been associated with market crashes.
Buffett Indicator
The Buffett Indicator has decreased from 199% last April to 175% now. This indicator compares the total US stock market valuation (Wilshire 5000 Total Market Index) to the GDP of the United States, suggesting that economic activity is slowly catching up with stock market valuation. Since the last update, we went from a strongly overvalued market to a market that is still considered overvalued.
2. Macroeconomic indicators
Inflation and interest rates
Efforts to control inflation through interest rate hikes have shown some effect, with inflation cooling down to 3.1% in November 2023, although it remains elevated as it is still above the targeted 2%. The Federal Reserve kept the fed funds rate steady at 5.25%-5.5% for a third consecutive meeting in December 2023, in line with expectations but indicated 75bps cuts in 2024. Energy costs have dropped, but there are pressures on the commercial real estate sector, higher interest rates, and reduced lending activity.
Unemployment rate
The US unemployment rate fell to 3.7% in November 2023, down from 3.9% the previous month. Despite being historically low, there is a slight upward trend, coupled with a global slowdown in annual employment growth, lower vacancies, and a mild upturn in unemployment rates.
United States National Debt
The US national debt has reached $33.8 trillion in November 2023, showing an accelerating accumulation. With a national debt to GDP ratio of 129%, a World Bank study suggests that a ratio exceeding 77% is adverse to sustainable economic growth.
3. US Bond Market
The US Treasury Yield Curve is inverted, indicating lower yields for 1-year and longer-term bonds compared to 6-months and shorter-term bonds. This inversion is often considered an indicator of an economic recession, meaning investors have less faith in the short-term economy and are therefore shifting to longer-term bonds.
4. Sentiment
Investor sentiment, crucial for informed investment decisions, is influenced by psychological factors. It shapes market dynamics, trend signals, and risk management. Recognizing sentiment extremes offers opportunities for contrarians and traders, guided by psychological nuances. Understanding sentiment enhances decision-making and the potential to capitalize on market opportunities, all driven by the collective psychology of investors.
Michael Burry: Scion Asset Management made a substantial bet last quarter on a potential Wall Street crash by purchasing significant put options against funds tracking the S&P 500 and Nasdaq 100. This move indicates a bearish outlook, suggesting that Burry is anticipating a downturn in the market.
Warren Buffett: Berkshire Hathaway sold almost $8 billion more in shares than it bought in the second quarter of 2023, a significant move considering the market’s upward trend. The selling of shares during a market upswing might suggest caution or a less bullish outlook.
BlackRock’s 2024 Global Investment Outlook highlights the challenges posed by increased macro and market volatility, urging investors to adopt a more active approach in response to the new regime of increased macro and market volatility, indicating a recognition of the challenges and uncertainties in the current economic environment. The emphasis on understanding structural realities and the call for a deliberate approach to portfolio risk suggests a measured and strategic outlook. Investors may interpret this guidance as an acknowledgment of the complexity of the financial landscape, prompting a careful and informed investment approach.
What Google users are searching for
The search volume for terms like ‘market crash’ and ‘recession’ notably surges just before and during a market crash. Currently, there is a slight uptick in searches for ‘stock market crash,’ but concrete signs of bearish sentiment are yet to emerge.
Bank of America’s monthly survey, assessing investor confidence, reveals that 74% anticipate a ‘soft’ or ‘no’ landing for the global economy in the next 12 months. Reflecting an improved mood from October, only 21% of investors expect a ‘hard’ landing in November 2023. In addition, Goldman Sachs has raised its 2024 S&P500 target by 8% to 5100, citing a favorable outlook for US stocks due to decreasing inflation and interest rates.
Conclusion: What’s Next
The stock market in 2024 presents a complex landscape influenced by various economic factors. While central banks are striving for a soft landing, the impact of monetary policies has led to declines in business investment and housing activity. Geopolitical conflicts and ongoing uncertainties pose risks to critical commodities, adding layers of complexity.
Investor sentiment, a crucial aspect, reveals extreme greed in the market, yet questions linger about its justification. Analyzing market valuation through metrics like the PE ratio, Shiller PE ratio, and the Buffett Indicator indicates a shift from a strongly overvalued market to one still considered overvalued.
Macroeconomic indicators, including efforts to control inflation and unemployment rates, present a mixed picture. The US national debt’s accelerating accumulation raises concerns, and an inverted US Treasury Yield Curve suggests caution with potential indications of an economic recession.
Examining the sentiments of influential investors like Michael Burry and Warren Buffett adds depth to the analysis. Burry’s substantial bet on a potential market crash aligns with a bearish outlook, while Buffett’s significant selling of shares during an upward market trend suggests a cautious stance.
Furthermore, insights from Google search trends and Bank of America’s investor survey contribute to the multifaceted evaluation. Despite an uptick in searches for ‘stock market crash’, concrete signs of bearish sentiment are yet to emerge. Bank of America’s survey reveals a majority expecting a ‘soft’ or ‘no’ landing for the global economy, reflecting an improved investor mood.
Goldman Sachs’ positive forecast for US stocks in 2024, driven by decreasing inflation and interest rates, adds a contrasting perspective to the overall analysis. In navigating the stock market in 2024, investors must carefully consider these intricate factors and remain vigilant in response to evolving economic conditions. I’ll continue to invest cautiously while keeping a close eye on global economic developments and justified investment opportunities.
