Predictions are Often Foolish
Predictions are often foolish, so call me a fool! Today I’ll be going over my top predictions for the world of finance in 2024. This is nothing more than a fun thought experiment to show just how hard it is to predict the future, even the next year, in the economy. It is very plausible not a single one of these predictions come true, because it is really impossible to have any idea what is to come. With that said, let’s get started.
1. The First Fed Rate Cut Comes Later than the Market Expects
The above chart shows that the market is currently pricing in a 64% chance of a Fed rate cut in March, and at the time of writing this article May and June have a 100% chance of a rate cut. I do not believe the Fed will cut in March, and that the cut will come in June at the absolute earliest. Powell has been talking very dovish in recent meetings, and the market has been rallying because they believe rates will be cut sooner than previously expected. I don’t see why they would be in a hurry to cut right now, as inflation is still working its way lower and unemployment is at a historically low rate. Unless things change quickly, a cut doesn’t seem necessary.
I do think I’ll end up being wrong about this, because if rates stay constant and inflation falls financial conditions will continue to tighten, which may have unintended negative consequences. But surely we can trust the Fed to make the correct decision in a timely manner, right?
2. U.S. Bonds have a Positive Year
The U.S. aggregate bond index has been up 43 of the last 49 years, with 2 of the years lower being 2021 and 2022. Amazingly, bonds have rallied significantly since October, and are looking to end positive for 2023. The below chart presents very clearly that it is very rare to have a down year in bonds. 2021 and 2022 was quite literally a once in a lifetime event, as bonds typically trend higher.
It’s hard to know what end of the bond curve will do the best in 2024, if the Fed cuts aggressively the short end will rally, if inflation keeps coming down the long end will rally. Regardless, I do believe bonds will have a strong 2024. I own TLT, which is a bond ETF that owns 20+ year duration bonds, and it has rallied nicely off its lows. I expect this to continue into 2024, and likely at all durations of the bond curve.
3. The “Magnificent 7” Stocks Don’t Lead the Market
This prediction of mine was probably #1 a few weeks ago, but now too many people are talking about it for me to have real conviction. If you’ve paid any attention to the market this year you may have noticed this trend where the top 7 tech stocks accounted for a massive portion of the overall gain in the stock market, and to show this I have two charts:
This first chart compares the S&P 500 market-cap weighted index to the S&P 500 equal weight index. As you can see starting around March is when the top stocks pulled away from the equal weight index, and haven’t looked back. There were several points throughout the year where the equal weight index was negative while the S&P 500 was up well over 10%, which was a red flag for many people. This gap in performance had not been seen in quite some time, so many argued it had to close, and that is exactly what has been happening:
Since November 1, the equal weight S&P 500 has been outpacing the market-cap weighted S&P 500. This shows that the average stock that has underperformed this year is starting to catch up to the magnificent 7, which is a trend I expect to see continue into 2024.
I am not bearish on AI, but I do believe a lot of these top stocks have priced in perfection in execution of their AI strategies. If any one of them misses a quarter, it could be devastating to their stock price. Meanwhile, sectors like financials, healthcare, industrials, and energy are cheap on a valuation basis and are making more money today than they have been in years (with the exception being energy, which still has great cash flows). I do believe that at some point investors will see the opportunity in these sectors and play that trade. We are already seeing outperformance in financials, and I would not be surprised to see the hard-hit regional banks shine in 2024 as the Fed projects rate cuts.
One final note here, I am not calling for tech stocks to get crushed in 2024 or anything like that, I just think if a sector like Industrials is up 15% next year, tech might only be up 6-7%. Seemingly every single time someone makes a prediction like this they are wrong, but I am willing to be wrong here.
4. The GLP-1 Mania Disappoints
This is an idea that is hard to quantify, but I’ll try my hardest to. Early in October I wrote an article (below) discussing the weight loss drug mania, and why I thought it was being way overblown. Stocks like Coca-Cola, Pepsi, General Mills, and Hershey’s were getting absolutely demolished, while the makers of the weight loss drugs Eli Lilly and Novo Nordisk were seemingly hitting all-time highs every single day. I do recommend reading this article for a more detailed description of my stance, as it hasn’t changed:
To summarize, I refuse to believe nobody will ever eat sugar or drink a Coke ever again. That is exactly how these stocks were trading, and it was flat out ridiculous. While some of them have recovered, stocks like Hershey’s are still hitting new lows as I write this. I have always said I do not believe these drugs will change a lifetime of behavior, and I stand by that. Not only that, but these drugs are $1,000 A MONTH. The average American cannot afford this currently, unless insurance steps in to change that.
While we have already seen this play out in some stocks, I do believe we will see a rebound trade in the food and beverage stocks in 2024 as people realize their numbers are not going to be absolutely crushed by these drugs. The stock I own in this category is General Mills, but it might be hard to go wrong with any of them if there’s a rebound in the sector.
5. The Dow Jones Industrial Average (Finally) Makes Some Changes
I’ve had an unpublished article written for some time now where I share my desire for the Dow Jones Industrial Average to make a few changes. I know many people ignore the Dow nowadays because they don’t believe thirty companies can be an accurate representation of the U.S. economy, but I appreciate the Dow because the names in it are good old fashioned blue chip stocks. That being said, there are three stocks that I believe should be removed from the Dow, and I think 2024 will be the year that two of them will finally get replaced.
The first one is Walgreens Boots Alliance. Quite frankly, this is a terrible stock. Down 65% on a 5-year basis and much more off its all-time high, I really do not understand why this stock is still in the Dow. The Dow is a price-weighted index, and WBA’s share price at $25 means this stock has no impact on any movement in the Dow. What should replace Walgreens is a tricky question, because an obvious answer is Amazon, but they seem to be too much of a wildcard in their spending to be added to the Dow. I’d really be open to just about anyone replacing Walgreens
The second stock that should be replaced is Intel. While the stock is showing signs of life, up 75% YTD, we all know that Intel is no longer the most important chip company in the world. Nvidia’s graphics cards are the leader in AI, and if AI is going to be as important as everyone believes, then Nvidia is a no brainer to replace Intel in the Dow. Sure Intel is making changes, moving their spending to higher growth and higher promise ventures, but Nvidia looks to be the powerhouse in the sector, and should definitely replace Intel.
The third stock that should probably be removed from the Dow but likely won’t be is Verizon. Verizon has been historically important in building a wireless network, which is undoubtedly the reason they are in the Dow, but I do believe they are becoming less of an industry leader, and their consumer facing business will only continue to hurt them. Once again, I have no idea who would replace them, and I also doubt they will be removed, but Verizon is a stock that I don’t think belongs in the Dow.
The Bottom Line
Who knows if any, all, or none of these will actually pan out in 2024, but at the very least it will be entertaining to see what happens. There are so many unpredictable events that make forecasting even the next year in the economy impossible, and I do not envy market strategists who have their entire firm looking to them for guidance. The stakes for me are low, as the worst case is a few people on the internet think I am in idiot. In reality, just about anyone could look back at what they expected for the year ahead and be surprised with what actually happened. With that said, here’s to a 2024 where I look like a genius!