If you like roller coasters, you’re going to LOVE our outlook for 2024. We’ll see it all: ups, downs, and loop-de-loops that will have you holding on to the edge of your seat (or your portfolio.) Let’s get into it!
The short version is we’ll have an optimistic start to a year that will likely end in a truly epic grand finale. We’ve poured over all the available economic data and trends, from GDP and USD to chart patterns and sentiment indicators. It all tells the same story: a good start, with asset bubbles further inflating, to a big drop and ultimately a down year for the economy and the markets.
The Fed is expected to hold interest rates as they are throughout the first quarter and the economy will celebrate. And rightfully so! Historically, during a pause in the rate hiking cycle, risk assets rip to the upside. Technical indicators and chart patterns are also showing a bullish setup. (High-yield bonds and various cryptocurrencies have already taken off to the upside, suggesting a true risk-on environment.) And rates on the 2-year and the 10-year will continue to decline, adding a tailwind to all risk assets.
Meanwhile, the housing sector will further deteriorate, the unemployment rate will creep higher, and non-farm payroll numbers will decline. Yet, the market will celebrate all bad news as good news and most risk assets will continue to march higher. The stock market will likely see several all-time highs in Q1; any pullback will be short-lived.
We anticipate that small caps will outperform mid and large-cap companies during this march to the top because small caps have lagged up until now in this risk-on environment. Even more money will flood the market after those first all-time highs as investors start to think it’s safe to join in under the incorrect assumption that the Fed has engineered a soft landing. The FOMO crowd will then also jump in creating a melt-up in risk assets caused by what is technically called a Gamma Squeeze.
At some point in Q1 or Q2, we expect the Fed will start cutting interest rates – they’ve always gotten it wrong in the past, and 2024 is not likely to be any different. Investors will continue to celebrate disinflation in hopes of that soft landing. But by the third or fourth interest rate cut, the Fed will realize interest rates were too high for too long. The lagging effects of the deflationary impact on the economy will be evident.
Our best-case forecast is a deep recession, and our worst-case is a deflationary depression. We sincerely hope it won’t come to that because the conditions that accompany a depression would most severely impact disadvantaged and underserved communities. Our way of life and standards of living would also suffer.
Sometime in the second or third quarter, housing and car payment affordability will crater under pressure. Personal interest payments will peak. This will squeeze consumer spending, causing the business cycle to turn. This will lead to an acceleration in unemployment claims due to mass layoffs at major corporations. Euphoria and bullish sentiments will give way to doom and gloom. The markets will interpret bad news as exactly that: bad news. There may well be a reckoning when market participants finally understand that the trifecta of unsurmountable debt, high-interest rates, and a deflationary environment is too much to overcome. No soft landing. Asset prices will fall rapidly (read: crash) to meet the new reality.
And while the catalyst for this is impossible to predict, a credit event might rear its ugly head. Don’t be surprised if one or more “too big to fail” banks collapse. It’s a disaster waiting to happen: non-performing commercial real estate, consumer credit debt, defaults on mortgages and auto loans, plus wild cards like a liquidity crunch, deposit outflows, unanticipated redemptions and market volatility. It may all be too much for an overleveraged bank to survive.
It might not sound appealing to stand in line for the economic ride of 2024. But people love roller-coasters for a reason, and opportunities will present themselves to the wise and prepared investor. Though it’s impossible to predict the timing of every curve or drop, we will be out of the market and in the safest of cash equivalents, while also avoiding counterparty risk, way before the market tops out.
In summary, enjoy the ride up. It will be exhilarating and may outperform even the most optimistic expectations. Just be sure your seatbelt is buckled. We expect the descent to be epic and unlike anything we’ve experienced before.
Wow, what a ride this will be!
