Outlook 2024: Soft Minds, Hard Landings

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Lisa Kalia Han and Jesse Pound of CNBC report the S&P 500 closes slightly higher Friday, but major averages end 9-week win streak:

The S&P 500 ended Friday modestly higher, but all three of the major averages snapped a nine-week winning streak following a stronger-than-expected jobs report.

The broader index rose 0.18% to end at 4,697.24, while the Nasdaq Composite added 0.09% to finish at 14,524.07. The Dow Jones Industrial Average ticked higher by 25.77 points, or 0.07%, settling at 37,466.11.

The three major averages notched their first negative week in 10, with the Nasdaq suffering the biggest decline at 3.25% — its worst weekly performance since September. The S&P 500 and Dow dropped 1.52% and 0.59%, respectively.

Stocks gyrated on Friday as traders assessed incoming economic data to determine if and when the Federal Reserve will start cutting interest rates.

The U.S. economy added many more jobs than anticipated in December, with nonfarm payrolls growing by 216,000. Economists polled by Dow Jones expected a gain of 170,000 for last month. The unemployment rate held steady at 3.7% in another sign of continued labor strength.

The report sent Treasury yields spiking higher, with the benchmark 10-year rate touching a high of 4.103%.

A strong labor market could mean that the Fed might potentially delay the first of its rate cuts, which traders have been eagerly anticipating. Before the strong data hit Friday, traders were hoping the Fed would start cutting rates as early as March and lower them by as many as six times in 2024. Those expectations will need to be dialed back.

While December’s ISM services index represented that business activity is still overall expanding in the economy, the reading of 50.6% was nearly two full percentage points below the Dow Jones consensus estimate of 52.5% and November’s 52.7% level. A reading above 50% marks the threshold for economic growth.

“The job market is looking good — perhaps too good — and maybe inflation will be running a little hotter now based on the wage growth that we’re seeing,” Mike Bailey, director of research at FBB Capital Partners, told CNBC. “This sizzle we’re getting in the job market might be pouring some cold water on hopes of a rapid string of rate cuts.”

He added: “Coming into today, investors wanted three things: fading inflation, a stable job market and rate cuts. However, I think coming out of today’s jobs number suggests to me that there’s some give and take here, and investors might only be getting one out of the three items on their wish list.”

The stock market surged to end 2023 as traders anticipated the Fed would pivot to easier monetary policy. The S&P 500′s weekly winning streak to end the year was its longest in nearly two decades and brought the benchmark’s gain for the year to 24%.

One other factor weighing on the market in the new year is the cooling off of large-cap tech stocks like Apple, which has been downgraded by two research shops this week. The iPhone maker tumbled 5.9% this week.

Alright, it's Friday, January 5th and time to get to my Outlook 2024.

Before I get to my Outlook 2024, I reread my Outlook 2023 where I was calling for a historic and painful earnings recessions and while I thought it was an excellent comment at the time, it turned out to be wrong, the market exploded higher led by a handful of mega cap tech stocks (aka, the "Magnificent Seven") and an AI fueled bubble.

Ironically, even though I was bearish on earnings and the US economy, I personally had my best year ever trading biotech stocks most of you never heard of or wouldn't touch with a ten foot pole.

That's right, LTK Capital Management was up huge last year, buying big biotech dips and selling the big rips on a handful of biotech stocks, but I'm certain I will never enjoy that stellar performance ever again (you never know but I am realistic).

No, I didn't trade Carvana which was up over 1,000% or Upstart or other momentum stocks that swung up and down, I focused on a small list of biotech stocks that top biotech funds own and traded them.

I was nervous, suffered one huge drawdown last summer but it all worked out in the end, luck always plays a big role in these risky endeavors. 

Interestingly, I kept looking at the strong labor market and kept waiting for clues that it is deteriorating significantly and it never happened.

Moreover, the CBOE Volatility Index (VIX) kept going lower and lower and after that huge Q4 run-up, it now stands at 13.35, a multi-year low:

And the US economy kept humming along and despite significant rate increases by the Fed and other global central banks, credit spreads didn't blow up, they tightened up and high yield bonds enjoyed a great rally last year:

The Q4 rally in US long bonds also helped high yield bonds and stocks:


So what gives? Why didn't the stock market follow my script and suffer a brutal earnings recession?

In short, the economy hang in there and judging by today's "red hot" US jobs report, it's still hanging in there but I remain more convinced than ever that this isn't going to last long and that sooner rather than later, we will feel the lagged effects of rate increases from all central banks, not just the Fed.

"Oh no Leo, are you still bearish? Stop reading Francois Trahan, posts from Dr. Michael Burry or doom and gloom crap from Mark Spiznagel and start reading more Tom Lee!"

No doubt about it, in 2023, Tom Lee trounced Trahan, Mike Wilson, Michael Burry, Mark Spitznagel and other bears last year who like me, were dead wrong and many suffered massive losses:

Again, why bother trying to predict this market when you know the game is rigged, a handful of powerful hedge funds rig it and the rest of market participants just go along for the ride.

How else do you explain the herding going on last year in Nvidia, Meta, Microsoft, Apple, Amazon, Google and Tesla?

Goddamn Tesla didn't crash and burn yet and Nvidia is still holding on to its massive gains and making new record highs:



There's an old adage I subscribe to, one that I invented in my head while trading: "The market exists to frustrate the maximum amount of investors all the time. Full stop."

You can forget about being rational -- sure over the long run you might end up being right, but over the short run it will bankrupt you.

That's why Keynes (or was it Gary Shilling?) rightfully noted "the market can stay irrational longer than you can stay solvent."

Just remember a handful of elite hedge funds control this market and you Mr and Mrs Retail Chump are just along for the ride.

Having said this, there are also a handful of elite macro funds and they're rarely wrong for long.

And despite what you think, macro still drives the economy and stock market.

That's why I tell young professionals to do their CFA right after school but to also look into doing the Macro Specialist Designation that Trahan and his team put together.

But I must warn you, all the courses in the world do not substitute for taking risks in markets with your own capital.

Until you start trading for a living, and actually relying on generating alpha to pay the bills, you will never understand markets or have a feel for them.

You need to sweat it out, you need to feel the lows of sustaining a major drawdown, you need to feel the lows of losing money to learn valuable lessons to make money in markets.

I might start my own swing trading course one day because all the books out there are total garbage, very few people really understand markets, technical analysis, macro and risk management.

Anyway, right now I have my hands full with a newborn baby and enjoying it. The rest can wait, including markets but the most valuable lessons always come by trading your own capital, just remember that.

Outlook 2024

My outlook 2024 isn't great, I remain bearish but do realize this is a presidential election year and typically nothing bad happens during presidential election years.

But this isn't your typical presidential election year, tensions are running high down south, if President Trump isn't allowed to run for any reason, I'm really scared something awful will occur.

I see domestic geopolitical tensions in the US just like I see foreign ones (Iran, China and Russia) and across the world, the rise of right-wing, anti-immigrant parties are reshaping the political landscape for better or for worse.

The war in Ukraine and Gaza will likely continue for the foreseeable future but I don't see either war lasting long or spilling into something bigger.

China is in deep trouble, its economy is stalling and there are some shady things going on there we do not know about:

China makes me nervous, if that economy stalls or starts decelerating, another wave of global deflation will clobber risks assets all over the world.

But there are plenty of other things that make me nervous right in the good old USA, like the extent of commercial real estate losses banks are holding and hiding on their books:

The only thing you need to remember this year is if something breaks in the market, the Fed will be forced to cut rates in chunks of 100 basis points intra meeting.

They will panic and markets will panic so those rate cuts will only pour fuel on the fire initially, turning a bear market into something more ugly.

I know the consensus view is we are headed for a soft landing, the Fed will start cutting rates in March gradually for a total of six rate cuts this year.

But that's just delusional, there will be no soft landing, no escaping a massive recession and the real surprise this year is what if wage inflation creeps up and the Fed is backed to a corner and doesn't cut as much as the market expects, or worse still, is forced to raise rates at the back end of the year.

Then what? Well, the massive Q4 gains will be given back as the market recalibrates and digests any negative surprise on sticky inflation.

Importantly, it has always been my contention that the easy part of disinflation is going from 7% back down to 3% but after that, going from 3% to 2% is a tough slug.

So, that big bond rally we saw in Q4 could peter out fast if inflation expectations pick up even if the economy starts slowing significantly.

That's called stagflation, high unemployment and high and persistent inflation.

If that materializes, it's bad for bonds and risky momentum type stocks.

The other thing I want to stress is this isn't a US recession but a global recession as almost all the major central banks raised rates significantly over the past 18 months.

That means good luck finding a place to hide.

Forget about bitcoin, maybe elite global macro hedge funds will fare relatively well, maybe.

I expect a lot more volatility this year as investors grapple with a host of economic and geopolitical issues and there will be opportunities to trade long and short but there will be plenty of risks too.

That's why my focus will be on the VIX, credit spreads, the US dollar (I remain long and strong), performance of big bank stocks and large industrials, and more to be able to gauge what's going on real time.

All I know is we are headed for a recession, 100% guaranteed and the fact that we averted one last year doesn't make me feel more confident that we will avert one this year.

Just a sample of posts that you should consider:

I can go on and on, just track me on Twitter now called X platform here but admittedly, I can't keep up with everything going on, just know that the soft landing scenario is a pipe dream.

What about private equity, private credit, real estate and infrastructure? I have serious concerns that this will not be a good year for illiquid alternative investments, call it a bump along the road or maybe a more profound secular shift.

That's why I recommend focusing more on liquid alternatives this year (like elite macro funds) and really picking your spots carefully in illiquid ones.

What about stocks? Oh boy, you can follow Tom Lee's advice and go long small caps but I'm wary of them in a recession even if I'm still trading small cap biotech shares:

 

What about defensive utilities and safe high dividend stocks like staples? Not really confident there either unless I know for sure long bond yields will continue to decline over the next 12 months:


What about big tech stocks, that uptrend looks intact:

No doubt, chart looks great but this is where I see the biggest risks not just for tech but for the overall market.

Why? Because of the magnificent herding that went on last year so if that unravels and elite hedge funds head for the exits, watch out because the beta effect can swamp the entire market.

And let me remind all the young folks out there who have never lived through a nasty bear market.

Here's how it typically goes, stocks get hit hard, you buy the dip and they pop a bit and then make fresh new lows, you buy the dip and they keep making fresh new lows, and so on and so on.

We have not seen anything nasty yet, quite the opposite, exuberance in a handful of AI stocks and some other risky stocks that were heavily shorted last year.

All this to say pick your spots carefully this year, don't be greedy, sweep the table as often as you need, never mind the bogus timeless advice of you can't time markets.

If you want to make money in a bear market, you better time markets well, anyone who says otherwise is an idiot who never traded in a bear market.

That advice goes for longs and shorts in this market.

And be especially wary of the biggest consensus trade of the year:

What are some of the other risks out there? There are plenty, just to name a few:

  • Another debt ceiling debacle and US government shutdown looming soon
  • Tensions in Taiwan and possible Chinese invasion (doubt it)
  • Tensions in Iran and wider regional conflict in the Middle East (doubt it)
  • Wider regional conflict from ongoing Russia-Ukraine war (doubt it)
  • A banking crisis due to ongoing commercial real estate losses (makes me nervous)
  • A full scale US insurrection as Trump supporters go ballistic if he's denied access to ballots (makes me very nervous)
  • Shift in Bank of Japan's ultra loose monetary policy (not likely but watching it carefully)
  • Terrible recession in Europe and rise of right-wing parties (very likely)

"Geez Leo, aren't you a bowl of cherries in this outlook? Is there anything positive to look forward to this year?"

Yes, focus on your health and loved ones, focus on things you can control, the rest is bullshit.

Those of you who want to read a good article, I recommend this one which goes over the views of Bill Harnisch, whose $1.5 billion hedge fund delivered a market-beating 31% gain last year, and is now betting the recent bout of euphoric stock buying will peter out:

What else? You should all read Trahan's latest comment going over his outlook and listen to his conference call early this week (January 10th at 10:30 a.m.);

Yes, he's still bearish on stocks but more bullish on bonds than I am.

Alright, let me wrap it up there, dragged my feet long enough on this outlook so needed to get it out.

Let me kindly remind all of you that this blog is free but I appreciate those of you who value the work that goes into it and support it financially. 

Importantly, kind words do not pay my bills, only my trading and blog revenues do so get to it and donate using PayPal on the top left-hand side under my ugly mug (minimum $500 a year for institutional, corporate and high net worth donors):

That message is mostly for the free riders, the people that read this blog religiously but never or rarely contribute to support it.

Below, Jeff Kilburg, Founder and CEO of KKM Financial, and Tiffany McGhee, CEO and CIO of Pivotal Advisors, discuss the markets on the last trading day of 2023.

Next, Tom Lee, Fundstrat Global Advisors founder, joins 'Closing Bell' to discuss the soft start for stocks in 2024, where he expects stocks to go, and more.

Third, Steve Eisman, Neuberger Berman senior portfolio manager, joins 'Fast Money' to talk what's ahead for the new year when it comes the the economy, real estate, markets and more.

Fourth, Jim Bianco, Bianco Research president, joins 'Fast Money' to talk his forecast for Treasury rates this year, what the Fed minutes spell out as far as rate cuts in 2024 and more.

Fifth, Drew Matus, chief market strategist at MetLife Investment Management, joins 'Power Lunch' to discuss the jobs report, the likelihood of a soft landing, and the US economic outlook.

Sixth, Cathie Wood, ARK Invest CEO, joins 'The Exchange' to discuss the 2024 market outlook, the impact of AI, and more.

Seventh, Jeremy Siegel, Wharton School professor of finance, joins 'Squawk on the Street' to discuss why Siegel favors value stocks this year, if the calls for strength in value stocks are warranted, and how convinced the equity markets are towards a soft landing from inflation.

Eighth, Morgan Stanley Chief US Equity Strategist and CIO Mike Wilson discusses his outlook for stocks in 2024 with Lisa Abramowicz on "Bloomberg The Open." (three weeks ago)

Lastly, Lawrence H. Summers, Former US Treasury Secretary dives into the persistent strength in the labor market and reacts to better-than-expected US jobs data.

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