Your market roadmap from here… the 2024 consensus view is bullish … the market remains overbought … the data supporting more bullishness as 2024 unfolds … tomorrow night’s big event
Long-time readers will know that I’ve had a bullish 2024 outlook on the stock market for a while. But now it suddenly seems like everyone thinks stocks will rally this year…
That actually worries me.
That comes from our hypergrowth expert Luke Lango.
Regular Digest readers know that Luke was one of the earliest bulls last year, urging investors to buy into leading tech/AI plays even though the consensus expectation at that time was for a 2023 recession and a struggling stock market. That market positioning led Luke’s subscribers to a slew of triple-digit returns last year.
So, when one of the biggest bulls at InvestorPlace reveals he’s worried, that catches my attention.
But let’s head-off any misconception ahead of time…
Luke remains very bullish about 2024. As we’ll detail below, the fact that other analysts have taken this position doesn’t diminish Luke’s excitement.
However, he does urge caution about what could be a bumpy two-to-three week stretch as the market “recalibrates” after becoming too frothy over the holiday season (even though the stock markets enjoyed huge gains today as bulls bought the dip aggressively).
Let’s dive into Luke’s roadmap for what’s headed our way.
January is likely to bring a pullback
To understand what’s behind Luke’s short-term caution, let’s turn to his latest Trading Room video analysis from AI Trader.
In AI Trader, Luke uses artificial intelligence to help source short- and medium-term trades on stocks that are surging in what are called “Stage 2 breakouts.” This emphasis on trading requires Luke to keep a pulse on the shorter-term ebb and flow of the market.
From his Trading Room video:
…Investors just got way too euphoric, too excited about those long-term growth prospects in the last two months of 2023.
It was one of the most frenetic rallies of all time, especially in smaller-cap stocks. According to our research, [November and December] brought the third-biggest rally ever for the small-cap Russell 2000 Index.
As I always say, stocks don’t go up in straight lines, not even in raging bull markets. So, we just took two massive steps forward in this bull market in November and December. It would be totally normal, totally natural, and even totally healthy for stocks to take a step back in January.
Part of the reason why Luke believes the market will pull back is because Wall Street’s rate cut expectations remain too aggressive
As we’ve pointed out here in the Digest, there’s a disconnect between the number of rate cuts projected by the latest Federal Reserve dot plot (three quarter-point cuts this year) and Wall Street forecasts (six or seven quarter-point cuts).
Beyond the scope of rate cuts, Wall Street also has been aggressive in its expectation for when these cuts will begin. The bullish consensus has been “March.”
Here’s Luke’s take:
We believe the Fed is going to cut rates in ’24 multiple times, but we don’t think that they’re going start in March.
The market, back around Christmas, was pricing in a 90% chance the Fed executes its first rate cut in March. Now that’s all the way down to 65% and falling.
That feels more realistic. To us, the March meeting right now should be a coin flip. When the market was at 90%, that was too euphoric.
Put it altogether, and here’s Luke’s bottom line on today’s market:
Stocks are overbought. They’re overextended; they’re way out over their skis.
Given this, Luke sees a selloff coming during the first two-to-three weeks of January.
But let’s switch gears to why he remains incredibly bullish on what comes afterward – even though he’s no longer the lone bull today.
The foundation for a bull market in 2024
A study of market history shows that when everyone takes the same side of a market bet, the opposite often happens.
Given this, it’s uncommon for Luke to find himself holding the consensus expectation. But he points out that his belief in the 2024 bull isn’t because other analysts think it’s coming, it’s due to the numbers:
My confidence in that claim isn’t rooted in consensus. Rather, I let the data inform me. And all the evidence suggests a rally is coming this year.
The economy is braced for a soft landing this year, wherein inflation drops and the Federal Reserve cuts rates while economic activity stays positive.
The headline inflation rate has dropped to 3%. Excluding housing costs, inflation is running at 1.4%. That’s below both “normal” levels and the Fed’s target, about 2%.
So, right now, the only thing keeping inflation slightly elevated is housing costs. And we’re already starting to see rents falling and home prices getting cut. The last “sticky” party of inflation is on its way out. As it leaves in 2024, inflation will firmly fall back to 2%.
Concurrently, the Fed has voiced support for cutting interest rates in 2024 if inflation does indeed firmly fall back to 2%. The market is now pricing in nearly 100% odds that the central bank will cut rates multiple times throughout 2024.
So – inflation and interest rates are going lower in 2024.
What history tells us about the bullish surge over the holidays
As Luke just profiled, we’re seeing Goldilocks economic data that supports a soft landing. Historically speaking, every time the economy has pulled off a soft landing, stocks have rallied. Luke suggests this is a reason for the furious rally we enjoyed last fall.
Now, yes, that rally has resulted in market froth that needs to drain out. But here’s Luke with what the data tell us about what’s coming if history repeats itself:
In November and December of this past year, the S&P 500 rallied about 15% – one of its sharpest year-end rallies of all time. In fact, since 1950, the stock market has only risen more than 10% in November and December six times before.
And all six times, stocks rallied the following year, with average returns of about 20%.
If I learned anything from investing over the past decade, it’s that you have to learn to respect what the market is telling you.
And right now, the market is telling us that stocks are going to soar in 2024.
Bottom line, the roadmap is simple: short-term market weakness followed by growing bullishness as we move deeper into 2024.
A reminder to join legendary investor Louis Navellier and Andy and Landon Swan tomorrow night at The A.I. Earnings Predictor Summit
Last week, pharmacy blue chip Walgreens reported earnings that beat estimates…but also reported it’s cutting its dividend by 48%.
This surprise dividend cut resulted in an 11% intraday stock price plunge.
It’s a perfect example of a point we’ve made many times in the Digest: Though earnings are what drive long-term stock prices, in the short-term, surprises to expectation are what move the markets.
But this creates an opportunity…
What if you had an AI tool that offered insights about upcoming earnings performance that had an elevated likelihood of positive surprises?
Well, Landon and Andy have just that, and tomorrow night, they’ll be discussing it when they sit down with Louis.
If you missed Saturday’s Digest, my fellow Digest-writer Luis Hernandez provided a great description of this Derby City Earnings Score.
From Luis:
During earnings season, investors can spot momentum and make informed trades by referencing a company’s Earnings Score, which is Derby City’s proprietary consumer momentum indicator.
Their method for determining the score is simple, quantifiable, and increasingly predictive. It relies on real-time consumer mentions from several social media sources to determine which companies are gaining (or losing) momentum.
Beyond consumer mentions, this proprietary AI tool factors in consumer demand growth, consumer sentiment, macro trend growth, custom brand-specific metrics, stock price performance as an indicator of investor expectations, and even the rate of change for many of these variables.
It’s a highly complex algorithm with startling accuracy. Louis, Landon, and Andy will be diving into all the details tomorrow night at 8 PM ET. It’s good timing considering how earnings season begins in earnest this Friday when the big banks report.
To reserve your seat for this free event, just click here.
Have a good evening,
Jeff Remsburg
