2023 was another year that left consensus predictions by the wayside. Coming into 2023 the consensus was for a mild recession, with markets struggling in the first half of the year and rallying in the second half. We did not see a recession and markets were strong all year, with a rapid momentum chase towards the end of the year the likes of which we rarely ever see. This has given way to the 2024 consensus of the Fed cutting interest rates, engineering a soft landing in the economy, and we are off to the races in all assets. Before we get into our surprises for 2024 let’s check out how we did for 2023.
#1: Volatility Spikes. Other than a brief jump in March when several regional banks failed, volatility was sold hard all year long.
#2: SAFE Banking Act Passes. Rumors of this coming back on the table came out in the summer, but still nothing concrete.
#3: Deflation becomes more prevalent than inflation. Inflation obviously peaked this year to the point where interest rates have recently cratered, dragging all assets up with it. Just don’t ask China about deflation.
#4: Buying opportunity of a generation for International stocks. International stock markets faired very well this year, from Japan to Brazil to Argentina to Germany.
#5: Geopolitical tensions ease. While the headlines around Russia may have cooled, the middle east has taken an unfortunate downward turn with Israel and Hamas.
#6: Options trading comes under scrutiny. Options trading has not come under scrutiny, but it has started to take center stage with record options volume, 0DTE on multiple asset classes, and options strategy funds seeing record inflows.
#7: Treasury bonds are the best performing asset. This went from worst performing to best performing in a matter of weeks on the Fed pivot. Still, too much pain for most of the year.
#8: Small Cap stocks outperform large cap. The average small cap outperformed the average large cap stock, but boy was this ever the year of the top 7!
#9: Unemployment Rate Skyrockets. Unemployment has moved higher, but nowhere near a spike.
#10: Lionel Messi comes to the MLS. If you don’t realize how much our society craves stars, regardless of craft, then I have some Taylor Swift tickets to sell you.
#1: Someone other than Trump or Biden wins the election. I do not like to spend too much time on politics because it is more theater than it is actionable, but every 4 years it does captivate a large part of the population in the United States. To say that politics have become more divisive over the last decade is an understatement. With the Far Left and the Far Right fully dug into their beliefs and both candidates having their shortcomings, there is no better time for someone to captivate that swing voter that may fall somewhere in the middle in the hopes of real progress and compromise.
#2: The 2024 Election Result stock market winner will end up being wrong. Every year after the election winner is announced we get hundreds of articles on what the new policies will mean for your investments and a new darling ramps into the end of the year. Without knowing which industry it is, I am saying that it will end up being wrong. Look at small banks after 2016 election or alternative energy after 2020 election and you will know what I mean.
#3: There will be no Soft Landing. I am taking the easy way out on this prediction because I am not going to make a prediction on which way it goes, but the odds of a soft landing are extremely low. Either, interest rate cuts are too late and they have to cut much faster and more than expected and we see a really hard landing or they cut interest rates too early and the economy and inflation explode higher because of it. The idea, that we will be able to slowly let the economy down along with inflation given we kept interest rates at 0 for a decade and then ramped them up over 5% in less than 2 years all while adding trillions of dollars worth of debt to the economy is just too perfect to actually happen.
#4: A major fund will blow up this year. The combination of concentration risk from the Magnificent 7 stocks, coupled with the explosion of usage in 0DTE options, the complete suppression of volatility, and the odd movements in currency and commodity markets will derail some large fund that is caught in the wrong trades. It will start with one asset price moving in the wrong direction and it will effect other trades in a portfolio that will cause forced liquidations and cause a volatility event because of it. This could come in the form of a flash crash like 2015, LTCM like 1998, or volmageddon in 2018. While these things do not happen often, the ingredients are there for 2024.
#5: Cash for Gold Commercials make a comeback. In 2011 cash for gold commercials were everywhere and it was the must own asset that summer. It has been left for dead and even though Gold is near record levels and central banks are accumulating gold at record paces, the actual investor sentiment and allocation to gold is near record lows. Precious metals could be the rage once again in 2024 as it gains more mainstream acceptance again as prices break to all time highs. Until you start seeing the cash for gold commercials you can continue to ride the train. Once those commercials show up on the radio, the tv, youtube, facebook, etc. It is time to get off the train at the next stop.
#6: Commercial Real Estate Problems Accelerate. With the idea that interest rates have peaked for the cycle, there is a view that many of the problems in commercial real estate will not come to fruition because refinancing will not be as big of a problem. So far, the problems in commercial real estate have been primarily in office and that has been a function of occupancy. This has kept the problems mostly contained, but a wave of multifamily completions (apartment buildings, condos) in 2024 will lead to a glut of inventory that even lower rates will not help. Oversupply is a much bigger problem than refinancing rates.
#7: Commodities bottom out relative to stocks. While inflation in general continues to come down, the underinvestment in commodity markets has created a supply/demand imbalance. As capital expenditures fall to decade lows in 2024 this creates an opportunity to own a broad basket of commodities for the next cycle. It will not be linear as different commodities crash at different times over the course of the year, but those crash prices end up being great entries for the next several years.
#8: AI mania fizzles. Although the longer term implications of AI are extraordinary, in the short term the amount of companies attempting to profit from this and the early stages of the technology are ripe for a misallocation of capital. The true economic benefits of such technology are probably still years away and there will be a lot of early adopters that fail. Think of what happened with the internet in the late 1990’s early 2000’s. Yes, the internet did revolutionize the global economy, but it was years before it became viable and many companies went to 0 before ever seeing the upside.
#9: Chinese stocks become investable again. After years of shady accounting practices, technology stealing, and a lackluster stock market, the Chinese government starts to realize it needs to cooperate with the United States and makes some concessions in order to get US money flowing back into the country. This marks a turning point that could set up for a decades worth of gains.
#10: Taylor Swift and Travis Kelce get married. I am not sure if this is a good thing or a bad thing, but given how popular Taylor Swift has become on the back of how her breakups have driven her hit music it may not be something the Swifties want to celebrate. If it makes her concert tickets more attainable so I could take my daughter, then it is fine by me.
I look forward to an entertaining year in the markets and will check back in December 2024 to see how these predictions pan out. Will 2024 finally be the year of the consensus!