Were You Too Bearish In 2023?

If you were as bearish as most market strategists were at the beginning of this year, many of whom have not changed their tune for 2024, you might want to reconsider with the S&P 500 set to hit a new all-time high in the days ahead. Ned Davis Research notes that when the index hits a new high after pulling out of a bear market, it is extremely positive for long-term performance. In fact, the S&P 500 outperformed its long-term average in the one-, three-, six-, and 12-month periods that followed, rising 13 out of the past 14 times for the one-year period by a median of 13.4%. This is one of many reasons why I am carrying my bullish outlook for 2023 into 2024. We are just 14 points shy of that new all-time high on the last trading day of the year, which would come with a close of 4,797. If not today, I think surely in the days that follow, which leads to more good news.

The S&P 500 is in the midst of a Santa Claus Rally, which is a phenomenon whereby the stock market posts a positive rate of return for the last five trading days of one year and the first two of the new one. We obviously won’t know for sure until next week, but it looks more likely than not. When Santa does show up with a gain over that period, the S&P 500 posts a positive return approximately 75% of the time for the entire year, with a median gain of 13.4%.

If we combine these two data sets, assuming both are achieved, then an approximate 13% gain in 2024 would result in an S&P 500 around 5,400. Perhaps that is why Ed Yardeni, who is a well-known and highly successful market strategist on Wall Street, recently provided 12 reasons why the S&P 500 will reach 5,400 in 2024. His 12 reasons, which you can read about here, are all fundamentally based. I wholeheartedly agree with his assessment, and when I can find technical developments in the market that strongly support my fundamental outlook for both the market and the economy, the stars have aligned.

That is how I felt shortly after last year’s Santa Claus Rally, which reinforced my outlook for a soft landing for the economy and the birth of a new bull market in January 2023. My rationale was based on fundamental factors very similar to the ones outlined by Ed Yardeni, and I will be providing my own Market Outlook for 2024 next week.

What I did not anticipate last year was the way the S&P 500 would make its ascent, as I was looking for quality and value to lead. Instead, it was all about the Magnificent Seven until the last two months of the year when breadth improved dramatically, and the rest of the market finally joined the party. I intend to double down on last year’s forecast for quality and value to lead, which means that breadth should be much improved in the coming year compared to 2023. The magnificent ones may not suffer steep declines, but their outsized gains for this year are not likely to be repeated. This is especially true if the economy lands softly and the decline in long-term interest rates is largely complete. There will be less of a desire to hide out in the mega-cap growth stocks that seem to be impervious to the business cycle.

It was easy to be swayed by bearish rhetoric throughout the past year, as Fed officials talked tough about keeping rates higher for longer to rein in inflation. I advised investors to focus on what Fed officials were likely to do rather than what they said. Constant warnings about “sticky inflation” ignored the steady disinflationary trend. There were several historically reliable indicators flashing warning signs about a recession, which I asserted were unreliable, due to the anomalies of the post-pandemic economy. There was also fearmongering about disastrous Treasury auctions that never occurred, and liquidity being drained from the markets by the Fed, which has yet to have any meaningful impact on markets.

I kept up to date with the bearish narrative throughout 2023, because it helped me vet my own bullish narrative. If we don’t consider contrarian viewpoints that might undermine our own assumptions, then we run the risk of being on the wrong side of the market for an extended period, from which it is very difficult to recover. The one thing that kept me focused was the steadily improving rates of change in the high-frequency economic data. Consider that the Russell 2000 index reached its low point coincident with the peak in the rate of inflation at 9.1% in June 2022. Granted, the small-cap index continued to test that low repeatedly in the year that followed before finally breaking out this month. The point is that the gradual improvement in the economic data on a collective basis, which strengthened the outlook for a soft landing in the coming year, was a trend that the market was likely to follow as the Fed’s rate-hike cycle came to an end. This is why I raised my target for the S&P 500 in June and saw new all-time highs two weeks later.

While I continue to be bullish into 2024, I also remain tactical. That means increasing and decreasing exposure to asset classes, depending on technical developments in the marketplace. It also means being prepared to pivot from a bullish narrative to a bearish one during the coming year if rates of change start to deteriorate. The major market averages are as extended to the upside today as they were at the beginning of August. That necessitates reducing risk for me, but only to the extent that I will be better positioned to capitalize on a pullback.

After calling for a pullback last August, I was early in my expectation for a rebound, as I did not expect to see a full correction in the S&P 500. Still, sticking with the underlying uptrend after a market correction at the end of October was the right call, because rates of change were continuing to improve.

Again, we are currently in an extremely overbought condition for the major market averages. That needs to be resolved by either another pullback or a period of sideways movement. We typically see a combination of the two. This leads me to believe that January may once again test the bullish narrative, but there is plenty of fuel in the form of money market funds to propel stocks higher. Therefore, I’ve taken some chips off the table as we come to the end of the year in hopes of putting money to work at lower prices.

This year has turned out to be an exceptional one for those who stayed bullish. As optimistic as I am about 2024, I will continue to follow the rates of change in the incoming economic and market data, allowing that to dictate my outlook for markets. When the indicators that I follow start to deteriorate, then I’ll adjust accordingly and advise my followers in these morning briefs that I post each day.

I hope everyone has a happy new year and a prosperous 2024!