Markets are in the midst of a correction.
After US stocks and crypto seemingly went up non-stop since the October 2023 bottom (which we called at the time), we're finally getting downward momentum.
As we've already discussed, these types of pullbacks are completely normal. And all evidence pointed to this one being overdue, which is why we hedged our tech stocks last week.
This was good timing, as our hedge was up as much as +15% last week. That said, the big question now is whether this is the start of a new bear market or simply a correction in the context of a secular bull market...
...and most importantly, how we as investors should position their portfolios.
So today, I’ll review my outlook for markets in 2024 and give you five investments you can buy today to profit off this outlook.
How I Forecast the Markets
I should start by saying that nobody knows for sure what will happen.
The stock market can do anything. And events like wars, new government policies, or changes to monetary policy can render even the soundest thesis moot.
That said, as someone who has been investing professionally since 2011, there are three factors I watch closely to help forecast where the market is headed:
Fundamentals: financial health of the market and economy (e.g. corporate earnings growth, US consumer market, US government fiscal policy, Federal Reserve policy)
Technicals: statistical trends gathered from trading activity (e.g. volume, relative strength index (RSI), or moving average convergence divergence (MACD))
Sentiment: overall attitude of investors toward a particular market (e.g. VIX, fear & greed, social media sentiment, seasonality)
And here's what they're telling me now.
#1: The Market's Fundamentals are Constructive
We are on the cusp of a new earnings season, with many of the world's largest companies reporting their financial results in the next 10 days:
Earnings have been mixed so far. However, last quarter earnings growth came in at a strong clip and investors expect full-year growth of +11% for the S&P 500. Since earnings are the key driver of stock market gains, this week's earnings reports are extremely important.
Second, the US labor market continues to defy expectations with the latest labor market report showing strong US job growth:
Third, the US government continues to spend like drunken sailors and recently approved another $1.2 trillion in spending:
Whether you agree with this or not is irrelevant. All you need to know is high government spending is supportive of asset prices.
Lastly, the Federal Reserve has tempered expectations on interest rate cuts. After starting the year with expectations of 6-7 cuts, the futures market is not pricing in 1-2 cuts by the end of the year:
However, the key here is the trend for interest rates is still lower. So while more cuts would have been better, it's still a good sign the Fed has room to cut rates, although rising bond yields complicate the matter:
While not perfect, it's my view that the market's fundamentals are certainly not an impediment to the bull market continuing. Consumers are still spending, earnings are growing, employers are hiring, and unemployment is still below 4%.
And while we're not getting as many cuts as expected, I don't view that as a death knell for the markets.
#2. The Markets Technicals are Mixed
Back in February, I told you the bull run was getting ahead of itself.
But I kept reiterating we needed to "keep dancing while the music played."