Market Outlook 2024

It’s been several weeks since we last updated our near term outlook for the markets; here, here, and here. We expressed a generally bullish view on stocks, bonds, and gold, largely on a generally bearish turn for the dollar. But not without an expiration date, for example:

”The combination of favorable seasonals and a completed inverse head and shoulder pattern in VT suggests further rally potential in stocks, albeit at a less breakneck pace, for the remainder of the year. This is further supported by today’s broad participation, where small stocks actually left the teracap techs in the dust, with the Russell 2000 up a smashing 5.49% versus the Mag 7 at 2.30%. Until the inflation feeds through to consumer prices, asset prices are free to rise unconstrained. After that the picture grows more tempered, as the inflationary impulse matures and the specter of further rate hikes resurfaces or the paint finally dries on the Fed’s shrinking balance sheet. Until shown otherwise, the broader bear market remains in effect; at this point a more volatile 2024 Q1 looks likely.

Bonds have completed a full five waves down in Elliott Wave terms. That implies substantial further upside after this grizzly bear market. While bonds and stocks have remained highly correlated longer than I have expected, a decoupling will still be necessary to complete the cycle.”

Markets have since performed largely as expected. Bonds and stocks have rallied sharply, and small cap stocks especially have left their large cap kin, including the storied Mag 7, in the dust. But these macro trends are now overextended, and we’re at the cusp of a turn in the calendar that will likely see them turn as well. The final trading days of 2023 brought us a bit of a preview for early 2024.

The narrative behind the bearish dollar and bullish action in most everything else – at least as denominated in dollars – is the financial media’s rush to embrace the long anticipated Fed Pivot. Inflation has been vanquished, the story goes, and the Fed will soon be slashing short term interest rates, if only to keep them from rising in real terms as inflation declines. The trouble with this spin is that it’s based on badly lagging inflation data. Consumer prices, and the measures that follow them, particularly CPI & PCE, whether “headline”, “core”, “supercore”, or other economic fiction, track not inflation but its exhaust fumes. The dollar depreciation seen in real time markets, foreign exchange, bonds, stocks, and commodities, is where it’s seen first.

And short term interest rates live first in the capital markets. So long as inflation is roaring there, “real” short rates remain low.

The Powell Pivot added some twenty trillion dollars of market cap to global stock and bond markets. Since it created no new goods and services, that gain in purchasing power must have come at the expense of losses in other securities; currencies, especially dollars, and if not soon reversed is destined to show up in consumer prices in the coming quarters.

At least some of it likely will be reversed. The bulls’ rush to front run the Fed is their own worst enemy. Having already priced in interest rate cuts, nothing is left to price in once they actually occur. Nothing truly new here, though, hence the Wall Street cliche “buy the rumor, sell the news”.

The picture is complicated by more conventional econometric data such as employment. Unemployment has begun to creep higher. And one of the most economically sensitive physical commodities, oil, has diverged from the rest, being notably weak, even in comparison with Doctor Copper, with whom it usually concurs.

So we’re hardly suggesting the rate cuts won’t come. On the contrary, they’re already established fact where it counts most … the bond market. The Fed itself is a lagging indicator. The bulls’ problem is their failure to account for what conditions will pave the way.

So putting all this together, the looming threat is a combination of a weakening employment market at the same time consumer inflation is poised to resurge. This is often referred to as “stagflation”. Financology however eschews the term, as it implies that simultaneous economic weakness and inflation is unusual enough to warrant its own name. It’s normal. Looked at without the artificial effect introduced by adjusting GDP with lagging inflation data, inflation is more accurately seen as contributing to, if not causing, economic weakness, especially if economic weakness is identified with broadly stagnating if not declining living standards.

Not to mention inflation is the first resort of governments trying to recreate the appearance of the prosperity their meddling has destroyed.

But here we’re concerned with financial market prospects. This cocktail is consistent with weakness across asset classes, but more so with stocks than with bonds. In fact a selloff in the stock market is the likely catalyst for the Fed rate cuts the bond market already prefigures. Sorry Wall Street, the rate cuts that you’re basing runaway stock price inflation on are will require stock price deflation to come first.

The only alternative is resurgent consumer price inflation resurges without bound.

Gold prices could powerfully benefit. Normally easy money can just as easily float stock prices as gold, but economic weakness drives in a wedge that channels the price largess in gold’s favor. Only when the markets begin to see “green shoots” does the easy money favor stocks.

6 thoughts on “Market Outlook 2024

    1. Finster says:

      Given the central bank’s record over the past fifteen years, the most surprising outcome would be if they didn’t

      All the stars have been lining up for a deflationary squall next year, most conspicuously the behavior of the yield curve. Despite its avowed determination not to let inflation become entrenched, the Fed won’t sit idly by while troubles in the repo market or on Wall Street threaten leveraged hedge funds or other institutions. It will throw John and Jane Q Public under the bus in a heartbeat to bail out its elite constituency.

  1. jk says:

    about bonds. you say bonds have completed a 5 wave down bear market, and i assume you are talking about bonds’ prices, not yields. but i question the prospects for bonds beyond the short end of the curve. fiscal stimulus is unrelenting, and the funding needs are huge and stretch well into the future. the fed may reduce short end rates, but it seems to me the long end is going to head back up and make higher highs. of course there’s a question of timing, but unless the fed implements yield curve control in some form, how can long rates stay down? those rates will likely attract more foreign capital and keep the dollar up relative to other currencies, even while it drops relative to hard assets.
    the other doubt i have about your scenario has to do with persistent positive nominal growth, even if real growth were to turn negative. [i struggle a bit in discussing this since i think the inflation numbers are bogus, so it’s hard to talk about “real” growth not knowing what it means.] away from wall street, people live in the nominal world. i think strong nominal growth is part of the economy’s surprising strength over the last several years, as predictions of imminent recession consistently fail to prove accurate.

    1. Bill Terrell says:

      Right … “bullish” on bonds means the same thing in my lexicon that it does for any other asset. Much of the financial media like to pretend stocks have only prices and bonds have only yields, but they’re much more alike than different.

      Almost any source for example will emphasize that prices and yields are inversely related for bonds. That the same relationship applies to stocks is however rarely acknowledged.

      Far as the market outlook is concerned, there are always opposing crosscurrents; a plausible case for any market moving in either direction. Any too obvious imbalance would be rapidly arbitraged away. Your points are perfectly valid; I’ve only cited the pressures I think will prevail in the near term.