The 2024 Stock Market Outlook will deliver direct insights into the financial landscape as we transition into the new year, featuring expert analyses, discussions on Federal Reserve pivot talks, and a forward-looking exploration of opportunities in 2024.
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00:00 Let's bring on Cameron Dawson, of course, CFA, Chief Investment Officer, New Edge Wealth.
00:06 And it's been a great year with just getting your perspective. One of the things is, I
00:11 think that you really taken Wall Street by storm, Cameron, so I wanted to give you that
00:15 feedback and it's really something that's impressive.
00:19 Well, I'm humbled that you would say that and I'm really grateful. Goodness is this
00:25 fun. I think it's the coolest job in the world to get to watch and follow markets every day
00:29 and then get to speak about it and get to speak to people like you. So thank you so
00:33 much for having me.
00:35 Let's go ahead. Let's kick it off, of course, with the current market sentiment being cautiously
00:39 optimistic, right? How concerned are you that the potential of overvaluation and the subsequent
00:45 market correction could be coming and what factors might actually trigger a scenario
00:50 like this?
00:51 Yeah, I think one of the most important lessons that we've learned really in each of 2022
00:57 and 2023 is just how important positioning and sentiment and valuation are for markets.
01:04 And I think that when we look at the start of 2022, we saw that positioning, sentiment,
01:10 valuation were all very stretched and it just created a very high bar for markets to jump
01:16 over. So when you added things like a tightening Fed and tightening liquidity, the end result
01:22 was that markets really had nowhere to go but down.
01:25 The opposite, of course, was true in 2023. One of the things I think we underestimated
01:30 the most in 2023 was the ability because positioning was light, valuations weren't that low based
01:36 on history, but they were definitely lower than they were in 2020 and 2021. But you had
01:42 gotten to the state of being washed out. Positioning light, sentiment was really washed out. You
01:47 saw that in a lot of sentiment measures. And then what you had then was a scenario where
01:51 you had a low bar to jump over. So we're really aware of what these factors are doing today.
01:58 And what we can see is that the market is in a state where positioning and sentiment
02:03 are now optimistic and overweight or overweight and optimistic, but they're not quite yet
02:08 at extremes, meaning that if you can compare back to end of 21, early 2022, of course,
02:15 you have very different leadership within the market. Valuations aren't as stretched
02:19 during that time as well. But you do have to be aware and cautious that if we continue
02:24 to see markets drift up and drift up with extraordinarily low volatility, that the risk
02:30 you run is that people get complacent. It's the classic Minsky moment. It's low volatility
02:36 creates the scenario for high volatility. And we've experienced this in other times
02:41 in the past, right? The blow off top in late 21, early 2022, times like early 2018 where
02:47 we had a blow off top and then a flash crash of volatility right after. And so I think
02:52 when we continue to look at this market, it'll be really alluring to believe every narrative,
02:59 the narrative of the soft landing and AI and unending earnings growth. But narrative only
03:05 gets you so far. And that's where we say, yeah, we think the market can continue. It
03:09 has great momentum. It's responding well to overbought conditions. It has some buying
03:15 thrust that's been happening. But once we roll into 24, watch sentiment measures, watch
03:21 positioning measures, and then you roll that into valuation. And it's when you get that
03:25 trifecta of all of those things being elevated. That's when those dynamics become a risk in
03:31 and of itself. So the message here is elevated, but not extreme, but could be on their way
03:37 to extreme sometime in 2024, which is just something that we should watch very closely.
03:44 Seems like there's a disparity right now, of course, with the market's expected rate
03:49 cuts and the Fed's more conservative approach, right? What do you think ultimately happens
03:54 here? Will we get the famous pivot in 2024?
03:57 Yeah, look, I wouldn't be surprised if they did some tweaks to rate cuts, 100% priced
04:04 in tweaks to the level of rates, meaning deliver some cuts. The question is, do you see the
04:10 Fed actually deliver the cuts that are being priced in by the bond market and are being
04:15 forecasted by many forecasters? I just heard three people, different people today forecasting
04:21 125 basis points of cuts. That is an aggressive assumption if you do not assume that the economy
04:30 weakens. Because if you look back in history, the Fed has never, ever cut more than 75 basis
04:35 points without there being some kind of recession condition. The other interesting thing is
04:40 that even when they were cutting by those 75 basis points in periods like 1995, 1998
04:45 and 2019, the Fed was afraid of a recession at that time. They were afraid that there
04:51 were different factors, whether it was the long-term capital management meltdown in 1998,
04:57 or you had the bankruptcy in Orange County in 1995, 2019, we had a trade war. They were
05:02 worried about a recession when they were cutting rates. The conclusion though from that is
05:08 that the market, by the time they finished those rate cuts in each of those scenarios,
05:12 had hit a new all-time high, with effectively equities saying, "Yeah, we don't believe it.
05:17 There's no recession here." I think that the mindset that we're approaching this is one
05:23 where we say, "Yep, they could cut rates." We could argue that a lot of those rate cuts
05:27 are already firmly priced in, whether looking at equities, looking at with valuations where
05:33 they are above 19 times, 19.2 times right now, reflecting some easier policy, but of
05:39 course looking at futures markets as well. If we get rate cuts, but no hit to earnings,
05:45 probably good for risk assets. But if we get rate cuts that come with some kind of economic
05:50 weakness, that's when you're cutting your earnings estimates. That's when the rate cuts,
05:54 you're not cutting for a good reason, which is falling inflation, you're actually cutting
05:57 for a bad reason, which is falling growth. It just comes back to this idea that not all
06:02 rate cuts are created equal. You might get some, but you probably don't get the full
06:07 extent of what's being priced in. The last point in this though, is do markets even care?
06:13 We started the year with the Fed pricing for December of 2023 of a market expectation of
06:19 4.5%. We're ending the year now, that market expectation of over 5%. So you've had a year
06:27 where expectations for the Fed have been tighter, more hawkish throughout the course of the
06:32 year. And yet growth stock valuations, tech stock valuations are all up over 40%. We've
06:39 never really seen that in recent years, which just means that the Fed has not mattered for
06:44 markets at all this year. We could argue that there's been better liquidity, but that I
06:49 think there is a debate is if the Fed has to be more hawkish, for example, because of
06:54 better growth, will markets even really care?
06:58 That's really interesting. A nice perspective there. Does the market really care? Even in
07:03 the face of a pivot, considering of course the valuations and you just mentioned that
07:08 those historic highs, how sustainable is the market's dependence on further multiple expansion
07:15 in absence of substantial earnings growth? I mean, we all look at Nvidia as a clear story
07:20 of this and some will point that it's times a hundred times, but I mean, really it's historic
07:26 highs on these valuations, but there's some earnings growth there. What are you seeing?
07:32 Yeah, it's interesting because there are pockets of the market, pockets of the magnificent
07:36 seven trading at lower valuations today, even though their stock prices are much higher
07:41 than they were trading back in 2021, for example. And part of that has been driven by the extraordinary
07:48 earnings growth. The magnificent seven grew earnings by on average, 160%. Now a lot of
07:54 that is Amazon and a lot of that is Nvidia. So you have some names like Apple and Tesla,
08:00 which didn't have extraordinary earnings growth this year, but it's important to note that
08:04 that mag seven cohort in many ways justified or earned their outperformance, maybe less
08:11 for names like Apple, which didn't have strong earnings growth, hasn't seen a big inflection,
08:15 but has seen a lot of multiple expansion. So when I look at the market overall, what
08:21 I see is an environment where 2023 was all about multiple expansion. You saw, I mentioned
08:26 the growth stocks are up over 40% on average in their multiples. If you look for the S&P,
08:32 it's up over 20%, much less for the equal weight index, which just means the average
08:36 stock has only seen this multiple go up by about 8%. So there's likely room for some
08:41 names to re-rate. We're looking at names that have been really beaten up in some sectors
08:47 that are trading at valuations that are very depressed. Now the risk of course there is
08:52 that these are value traps and what is cheap stays cheap, but there are pockets of opportunity.
08:59 I think the challenges we go into next year, and you asked about the sustainability of
09:03 multiples, is that if you look at a lot of the biggest bull case scenarios, they're effectively
09:08 saying we can get more multiple expansion. And the thing that 2023 has taught everybody
09:14 is never say never. Sure. You could maybe make an argument that you'll get back to 2020
09:20 and 2021 type of multiples, meaning that you could trade above 20 times forward earnings.
09:26 The challenge is that this is a very different environment than 2020 and 2021. 2020, you
09:32 had very depressed earnings. You put a big multiple in depressed earnings. Earnings
09:36 then grew 50% in 2021. So you're rewarded for putting a big multiple on those earnings.
09:41 But you also had huge, huge Fed support. I mean, the Fed was growing its balance sheet
09:46 by over $5 trillion. Real interest rates were negative 1.5%, 2%. They had cut rates to zero.
09:53 They were the largest shareholder, like the eighth largest shareholder in HYG for gosh
09:56 sakes. So there was so much stimulus from a monetary standpoint, so much liquidity that
10:04 really did support valuations for a time being very elevated. So it's not our base case that
10:11 we can return to those 2020 and 2021 type valuations, except for if we go back into
10:18 some kind of bubble. And what I mean by bubble is that the only other time that you had valuations
10:24 above 20 times on a forward basis sustained was in the late 90s. And of course, the late
10:29 90s, we had a tech story and you had this rising earnings growth that actually decelerated
10:37 into the end of the 90s. And so it was really based on just multiple expansion. And that
10:42 multiple expansion was fueled by a Fed pivot. 1998, Greenspan pivots because of LTCM, because
10:48 of the Russia debt default, because of the Asian currency crisis. And that's considered
10:54 to have sparked the final stages of the tech bubble. So for all this concern and worry
11:00 that Powell is going to be Arthur Burns, meaning from the 70s and kind of stoking inflation,
11:08 maybe they should be concerned. And maybe it's not a concern. We could have this debate
11:11 about it that maybe Powell doesn't want to be Greenspan pivoting into a stronger economy
11:16 and a bullion market and sparking what could be a big melt up rally.
11:24 All vital points there. Let's get into sector and investment strategies. Do you see any
11:29 as potentially maybe overlooked here, but offering strong growth potential in the current
11:34 market climate? Yeah, I think it's going to be another year
11:39 of pain trades. I think 2023 was all about pain, as was 2022, right? 2022, we started
11:46 the year and everybody was long tech because it was stay at home and it was the best businesses
11:51 and they were pseudo monopolies. And then of course, they got walloped in 2022, but
11:55 then nobody wanted to own tech. And so of course they did great in 2023. And so I do
12:01 wonder if the most consensus parts of the market or the areas or the crowd of most crowded
12:06 parts of the market that despite being great companies, great stocks, that you could see
12:11 rotations and fairly violent rotations in a short period of time. I would bring up early
12:17 2016 as a great case study of what can happen when markets move quickly. You had a period
12:23 of over just over two weeks where almost the entirety of the year's outperformance of value
12:29 in cyclicals was made up over growth after they had underperformed through 2015. And
12:34 it happened in a blink of an eye and then they went sideways for the rest of the year.
12:39 So don't be surprised if you see violent rotations and positioning rotations. Look at what's
12:44 happened with small caps recently, right? You had a huge rotation into small caps on
12:49 a short, it looks short covering because it looks like it's losing some steam, but positioning
12:53 so light that these things can move really quickly and catch a lot of people flat footed.
13:00 So we're long-term investors. We're sticking with our quality bias. We think it still is
13:06 going to be, it'll still work in 2024. It worked really well in 2023, even through what
13:12 has been a strong bull market, our quality bias has led us to outperform our underlying
13:19 indices because we're looking at companies with great balance sheets and good return
13:23 on invested capital and good free cashflow. And those companies tend to do well in periods
13:28 of economic uncertainty. And I would argue that we're still in a period of economic uncertainty.
13:34 Soft landings don't last forever. Maybe we go into a period of people calling it the
13:39 roaring twenties. I don't like the term. However, that's your most bullish scenario. And that's
13:46 where at this point you'd want to buy junk. But I think that sticking with quality, sticking
13:51 with that long-term focus on kind of across sectors is where we want to continue to be
13:55 positioned next year.
13:56 I think this leads of course, to the loud predictions of 2024 recessions. A lot of people
14:02 out there talking about it. And now it seems like there's a little bit of a mix. Some people
14:08 were saying that there might be a milder economic downturn. What do you think about
14:13 these differentiating analyst views? Are they missing the mark here or do they hold substance
14:19 for the revised forecast?
14:21 I think the most challenging thing about this very moment is that you can make a very rational
14:27 argument either way. And this is what was so confounding and challenging about 2023.
14:35 It's funny, the nuance of our view to start the year was that you're not going to have
14:38 a recession as early as expected. That would cause the Fed to be tighter than expected,
14:43 which would keep a downward pressure on valuations and keep equity returns muted in 2023. That
14:49 last part of downward pressure on valuations, of course, was wildly wrong. Meaning that
14:55 the Fed, as we talked earlier, didn't matter for valuations. You still saw a ton of multiple
14:59 expansion. And so we continue to not see evidence yet of an imminent recession. But there are
15:07 things to point to that should give people pause. I think one of the most important ones
15:14 comes from Torsten Slauck over at Apollo. And he talks about how, yeah, delinquency
15:19 rates are up. They're up a lot over a shorter period of time. You zoom out, they don't look
15:25 all too nefarious. They're still just back at 2019 levels and talking about things for
15:30 like autos and credit cards. But his point is, and it's really good and nuanced, which
15:35 is that, yeah, delinquency rates are up, but look how strong the job market is. So imagine
15:40 if the job market were to actually weaken, what would consumer balance sheets look like
15:44 then if people lose their jobs? And I think that that point is that the more we get confident
15:51 and hyper consensus that no recession is going to happen, as a whole, the more individual
15:58 investors should be attuned to the risk. That doesn't mean preparing for doomsday. It just
16:03 means that we can't get complacent. We still have very high interest rates compared to
16:08 recent years, which means that companies are going to start refinancing in 2024. We haven't
16:13 had refinancings a lot in '22 or '23 because you had a big refinancing wave in '20 and
16:19 '21. So you're going to have a lot of small and medium sized businesses that are going
16:23 to have to kind of reassess their business at a higher borrowing rate. A lot of companies
16:29 turned out their debt, but those companies tend to be large cap companies that have that
16:33 benefit. So the real refinancing wave comes in '25, but it's a trickle in '24. I would
16:40 watch that very closely to be a sign that maybe even if the Fed is cutting interest
16:46 rates, that you start to see some credit stress emerge on balance sheets. It's uncertain at
16:52 this point if that will metastasize into actual employment weakness, which just means we have
17:00 to follow the data. And the data is going to be, it could be volatile. The last part
17:07 I'd make is also follow what the market's telling us. The most valuable indicator, one
17:12 of the most valuable indicators we're watching right now is equal weight discretionary versus
17:16 staples. This ratio has led revisions of consumer consumption data within GDP, which just means
17:25 that when this ratio peaked back in early 2022, it peaked right before you started to
17:32 see consumer spending data get revised lower. But then it bottomed in early '23 and it bottomed
17:39 just as you were starting to see consumer spending expectations revised higher. It made
17:45 a new year to date height this week. So it's not sending a signal yet that run for the
17:51 hills, the consumer is going to struggle. But when that thing breaks, watch it.
17:59 You heard it first here, Cameron Dawson, of course, definitely smashed the light guys.
18:03 Let's talk of course a little bit of a wrap up here. What potential catalysts, upcoming
18:07 events will you be watching in '24 that could trigger of course rapid market shifts in the
18:13 dynamic and just a final outlook for '24?
18:18 We have an election year, which is always a source of uncertainty. And there's a lot
18:23 of great work by analysts such as Dan Clifton, who shows how incumbent versus challenger
18:30 and how that impacts equity performance. So that adds kind of a wild card. I don't want
18:36 to call it fun because then it means when I'm watching Jeopardy, I have to watch all
18:40 these political commercials, which is hardly fun. I think that fiscal deficit as well as
18:45 the funding of that deficit will be very important to watch. The fiscal situation has not been
18:53 an issue over the last month, but of course it was an issue in September and October when
18:58 we get the quarterly refunding announcement at the beginning of '24. Do we start to see
19:02 a bit more volatility reemerge in the bond market as treasury really has to step up issuance,
19:07 not of bills, but of bonds? So we're watching that really closely. And then I think as we
19:12 think going into '24, our base case is that we're not seeing evidence yet of an imminent
19:20 recession, but watch out for potholes, watch out for a surprise deterioration in data.
19:25 We've been threading this very fine line of ultra goldie locks between low inflation,
19:31 lower ring inflation, it's not low yet, and strong growth. And it wouldn't be surprising
19:36 to see something break in one direction or another. The last one in that is watch energy
19:41 prices because energy prices have been the largest source of the decline in headline
19:46 inflation that we've had this year. And that's partially because energy prices were very
19:51 high in 2022, so they were top comps in '22. They've fallen in 2023. So the comps aren't
19:58 as tough for your energy decline. So if we start seeing energy prices rise on a year
20:04 over year basis, that could have very important implications for things like the dollar, break
20:10 evens, yields, and even the pricing of future Fed policy path. So that's an important wild
20:17 card as we think about what could drive markets in 2024.
20:23 Cameron Dawson, CFA, Chief Investment Officer at New Edge Wealth.