A Sneak Peek into the 2024 Stock Market Outlook: Risks, Rewards, and Top Strategies

‍As the curtains fall on 2023, stock investors are performing their annual ritual of portfolio reflection—bulls and tech-heavy investors with satisfied smiles of fortune's favorites, bears & value investors with the furrowed brows of the less favored. It is like 2021 all over again. Just check how value vs growth is diverging again in favor of growth:

If you have been following me on Etoro, you may have noticed the volatility of my results has decreased significantly, and so did my "risk score". This is because I have been shorting a sizable position on the tech-heavy QQQ index which ended to new highs by the end of the year. As you can imagine, this one did not do well, even though it did. Let me explain. I never bought the tech rally this year, and this short QQQ was meant to allow me to "wait and see" without too much exposure to growth stocks with which my portfolio was mainly built. So, even though my short position is in deep red, the rest of my portfolio did very well, with the overall making +17% in 2023.

So how is this good news?

The good news is that I can follow an investing plan 🤓! And it did what it was supposed to do: lower our exposure to high volatility. I just did not think economists were so deadly wrong about the state of the economy. Still, I would be making my victory lap if economists were good at their job, and the "worst case scenario" is the current one where we still managed to make +17%.

Enough talks about the past, what does the future have for us?

Reasons to Rejoice about Investing in 2024

A Stable Stock Market Landscape

Investors have a lot to cheer about as we step into 2024. The stock market seems to be holding its fort with some big-name analysts projecting the S&P 500 index to grow by 5%.

Inflation under control

Inflation, the invisible arch-enemy of consumers and businesses alike, is expected to take a back seat in 2024. This decline is anticipated to reduce the financial burden on consumers and businesses, allowing them to breathe a little easier.

A Favorable Job Market

The unemployment rate for 2024 is projected to remain low, painting an optimistic picture for job seekers and businesses. A thriving job market is an indication of a strong economy, although it sometimes drives more inflation...

Anticipated Interest Rate Cuts

Another feather in the cap of investors is the expected cut in interest rates by the Federal Reserve. Lower interest rates could make it more attractive for businesses to finance their growth, potentially leading to a higher return on capital.

The Dark Clouds: Risks to Watch Out For this 2024

Vulnerabilities in the Global Economy

Despite the recent decline in inflation, the global economy is not entirely out of the woods. Europe faces the threat of a recession, while America might dodge this bullet.

China's Economic Slowdown

China's economic slowdown is a growing concern for investors worldwide. Any turbulence in the Chinese economy could have ripple effects on global markets, making it a significant risk factor. Home prices are a time bomb for the Chinese middle class and political stability.

Geopolitical Tensions

The geopolitical landscape is another element that could stir the calm waters of the stock market. Rising geopolitical tensions, Ukraine and Palestine to name a few hot spots, could hinder global trade and economic growth, thereby impacting investment returns.

A Potential Housing Market Correction

JPMorgan has highlighted a potential housing market correction as one of the biggest risks to the global economy. A sudden drop in housing prices could trigger a financial crisis, reminding investors of the 2008 recession.

The Trump Factor

The potential re-election of Donald Trump in the United States could exacerbate economic uncertainties and heighten market volatility. His policies and decisions could have far-reaching impacts on the global economy and the stock market.

A Soft Landing for the Global Economy

Economic forecasting is a tricky business, as the majority of economists predicted a 2023 US recession which never happened. However, despite its challenges, it offers valuable insights into potential market trends and risks. What most economists are saying is that the global economy in 2024 is on track for slow growth (aka "soft landing"). So it is like the start of 2023, but upside down: all are optimistic. This means any misstep along the way would entice Wall Street to punish bulls as this is a game of expectations. So yes, I put the good economic mood as a risk factor.

US Market Valuation

When it comes to the US market valuation, I am sounding the alarm bells. The Shiller PE ratio, a reliable measure of market valuation, is currently at 32.4. This is a whopping 23.4% higher than the recent 20-year average of 26.3. I get to a similar conclusion (fair value of barely $4.000 for the S&P500, more than 20% higher than today´s price) with a classical DCF model taking into account earnings forecasts for the next couple of years.

GREEEED

AAII investor's sentiment is extremely optimistic, with the 8 weeks average bullish ratio as high as 47%, way into the greed territory (aka more than one std deviation from the historical mean), and the CNN "Fear & Greed " index is flashing"Extreme Greed".

This is a problem because when greed takes over, investors tend to overlook the fundamentals and chase after high returns, often leading to risky investment decisions. This could result in a bubble, which when bursts, can lead toextreme swings.

Wall Street analysts and Economists are mostly useless, but sometimes they do make sense. This is what I learned from reading the market outlook of JPMorgan, Citi, Wells Fargo, Goldman Sach, and a few more like it.

The Fixed Income Investing Opportunity

Because of the anticipated cut in interest rates, fixed-income and high-quality credit markets may offer attractive opportunities for investors (bond prices rise when interest rates decrease). The risk-reward ratio seems like a no-brainer as US treasury bond prices are still close to their lowest point from the past 15 years.

Emerging Market Opportunities

Emerging markets offer higher growth and returns, making them attractive to investors. However, careful evaluation and understanding of country-specific risks are essential. Mexico and India are two emerging markets that are expected to outshine others in 2024 according to many Wall Street analysts. What is starting to be a pattern is that most see non-US markets as better valued and, hence offer greater expected returns. GMO even has an "expected long-term returns" by market on their site, and it looks like this:

The Digital Gold Rush: Investing in Cryptocurrencies

Cryptocurrencies, the modern-day digital gold, are proving to be as resilient as roaches. Despite market volatility and regulatory crackdowns, cryptocurrencies have managed to survive and thrive. Their decentralized nature and innovative underlying technology make them an appealing investment option for risk-tolerant investors. BTC made its way into my second biggest position within my portfolio, don´t expect me to sell.

My game plan for 2024

Fortune favors the brave, and in the world of investing, the brave are those who dare to stay informed, stay resilient, and don´t necessarily follow the crowd.

Being brave at the start of 2024 is being the contrarian, the bear. I am not making substantial changes to my holdings, but I will slowly increase my QQQ short position to better face what I see as highly probable backlashes. I also opened a long-term US bond ETF $TLT. So yes, it is more or less the same play as last year, just that it is now the contrarian play, which I like better this way.

There are a few gems out there that I am looking to enter, combining my rookie investor scorecard to make sure these are quality companies with my "price expectation checker" to avoid frosty valuations and increase our risk-reward ratio. Right now, I see many such opportunities, like DOCU, CRWD, MELI, and BL just to name a few. On the other side of the coin, I will trim some positions that are trading in extremely high-expectations territory, like what I did with NVDA. I have a few candidates on this list, such as ADBE, ASML and SNPS, but I need to deep deeper before taking a stance.

Last but now least, I have been working hard (and spending a ton on data scientists and statisticians consultants) to build a quant model (aka AI-powered predictions based on hundreds of market fundamentals) to better size my short QQQ position. I expect to start using it during the first half of 2024. Very excited about this.