The S&P 500 is up nearly 25%, and the technology-heavy NASDAQ 100 is up over 50% in 2023. Stocks have been strong since late October; however, much of those gains happened in the first six months. Surprising many investors who were still reeling from 2022's bear market.
The early-year strength likely caught many flat-footed, but Doug Kass wasn't among them. Last December, the long-time hedge fund manager, whose career stretches back to the 1970s and includes a stint as Director of Research at Leon Cooperman's Omega Advisors, was one of the few to say in December that stocks could rally significantly through June.
The S&P 500 went on to eclipse Kass's full-year expectations, increasing uncertainty for what may happen next. Recently, Kass released his "10 Surprises for 2024," including a new target for the S&P 500. Given the portfolio manager's prescient prediction this year, investors should pay attention to what Kass thinks will happen to the S&P 500 next year.
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Stocks surged higher in 2023 but concerns remain
The Federal Reserve is progressing in its war against inflation, but it's still too soon to declare victory. Goods and services still cost more than they did last year, pinching consumer wallets and hamstringing the U.S. economy.
Since March 2022, the Federal Funds Rate has increased from 0% to 5.25%, making borrowing expensive for households and companies. So far, we've avoided a significant drop in economic activity or a spike in unemployment, but economic warning signs are flashing.
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The Federal Reserve said in December that gross domestic product, or GDP, will fall to 1.4% in 2024 from 2.6% this year. Manufacturing activity remains downbeat, given the industry has contracted this year, according to the ISM Purchasing Managers Index (PMI). We've also seen the services PMI trend lower since late in 2021.
Employment remains healthy, with unemployment at just 3.7%. However, it was 3.4% in April, and companies are hiring fewer workers. There were 8.7 million open, unfilled jobs in October, down from 10.5 million one year ago, according to the Bureau of Labor Statistics' monthly Job Openings and Labor Turnover Summary.
Consumer delinquency and defaults have also risen this year. For example, Capital One's credit card delinquency and default rates were 4.55% and 5.19% in October, up from 3.91% and 4.43% in November 2019. They're far from alone. Defaults have picked up across most credit card issuers and delinquent subprime auto loans are near 30-year highs.
Corporate earnings aren't all that healthy, either. Earnings at S&P 500 companies rose 4.7% in the third quarter. However, the fourth quarter growth outlook has fallen to 2.4% from 8.1% at the end of September.
In 2023, stocks have climbed this arguably steep wall of worry, but investors may not ignore those headwinds for much longer.
Will the S&P 500 continue climbing in 2024?
Doug Kass is one of the few Wall Street veterans with nearly 50 years of experience who still regularly shares his thoughts with Main Street investors. Kass shares what he's buying and selling (and why) with individual investors in his daily trading diary on Real Money Pro.
Recently, Kass unveiled his annual "10 Surprises" list for 2024, providing insight into probabilities that many market participants may underappreciate.
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Of course, his 'surprises' tend to contradict conventional wisdom. Instead of following the herd, Kass, a self-proclaimed contrarian with a calculator, is most comfortable when few people believe his views.
This contrarian streak helped him predict a big rally earlier this year when everyone else was wringing their hands.
Perhaps unsurprisingly, given the worrisome economy and the S&P 500's big move this year, his outlook for stocks is downbeat for 2024.
Kass writes:
"Despite all the macroeconomic, geopolitical, and political drama, the trading range for most of 2024 is the narrowest in years. The S&P Index ends the year with about a 5%-10% decline. Led by the drop in the shares of Apple, the Nasdaq ends the year with a decline of between 10% and 20%. The market doesn't broaden out further and the Russell Index also exhibits a loss for the year as many components of the Russell face financial (debt rollover) and operating headwinds."
Kass' bet that stocks could disappoint in 2024 is driven by other items on his "10 Surprises" list, including his outlook for what could happen with inflation and interest rates.
Kass expects "neither a soft landing nor a hard landing – just very sluggish real growth in the U.S. economy."
Despite recent optimism that the Fed will reduce rates throughout 2024, he believes the Federal Reserve will only cut them twice. Those early-year cuts will contribute to inflation taking hold again, putting the Fed back on pause.
"Though domestic growth begins to trail off in the last six months of the year and unemployment moves higher, no further interest rate cuts occur over the balance of the year," says Kass. "The yield on the 10-year Treasury, which today is at 3.91%, never declines below 3.75% and fluctuates between 3.75% and 4.75% most of the year. A developing US recession, late in the year, sends the budget deficit as a percentage of GDP to 10% or more – overwhelming Treasury supply and sending the 10-year yield back above 5%."
Since banks use the 10-year Treasury yield to set lending rates, higher rates will weigh down GDP in the back half of 2024, and because it's also used as the risk-free rate in equity valuation models, stock prices could be capped. Toss in a healthy dose of uncertainty stemming from the Presidential election, and you wind up with a recipe for weakness that Kass believes isn't being considered by enough investors.
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