Get Ready for a “Trader’s Market” in 2024

As the Federal Reserve and Treasury Secretary continue to deny that a recession ever happened, many retail investors assume that the worst is behind them and 2024 will be an easy year of stock market gains. That assumption could cost unwary stock traders a whole lot of money over the next 12 months.

Price targets vary, but analysts with Wells Fargo Securities only expect the S&P 500 to reach 4,625 at the end of 2024. If the S&P 500 is currently around 4,550, then the Wells Fargo analysts are basically predicting a flat-to-slightly-higher year.

This doesn’t mean the entire year will be bad for equities. “The second half will be better, but the first half is going to be really, really sloppy,” the Wells Fargo analysts forecast.

Now, I’m certainly not recommending that people should make their financial decisions based on what any particular group of big-bank analysts say. What you can do, however, is consider the reasons for their bearish calls.

Chris Harvey, Wells Fargo’s head of equity strategy, offered a cautionary thesis based on the current reading of the VIX, which is the CBOE Volatility Index. It’s also known as the stock market’s “fear gauge,” and when it’s unusually low, it suggests that the market is complacent.

With the VIX near 13, Harvey isn’t confident that the market can remain so complacent in 2024. “Every time we’ve gone into a new year with the VIX at 13, we’ve seen spikes. We’ve seen the equity market pull back, and it’s just not a great setup into 2024,” he observed.

Courtesy: Yahoo Finance

Indeed, the low VIX print indicates a market that fully expects a strong finish to 2023 and smooth sailing in the first several months of next year. But always remember Warren Buffett’s principle, which is to be fearful when others are greedy.

What is there to be fearful of now? Harvey’s thesis is that the stock market is in a catch-22, can’t-win scenario. “It’s really hard to get excited. If we have better [economic] growth, then the Fed doesn’t do anything. If we have worse growth, then numbers are going to come down and then the Fed will eventually cut,” he explained.

Additionally, the Federal Reserve’s series of interest rate hikes has made it expensive to borrow money. This is a problem for businesses and individuals, as they will have to pay high interest rates on business loans, mortgages, auto loans, student loan debt, and so on.

The stock market has been resilient despite high borrowing costs, but the other shoe will have to drop sooner or later “As long as the cost of capital stays higher, it’s really hard for me to get to a much higher price target,” Harvey warned.

Bear in mind, Harvey’s subdued price target is for the S&P 500 large-cap stock index. This doesn’t mean you can’t invest anywhere with confidence. Commodities, along with the companies that mine them, are generally still a good value now.

Courtesy: BarChart.com

You might be surprised to discover the bargains that are ripe for the picking in the precious metals mining space. For example, silver is at its highest level in several months and looks ready to break out, yet a number of silver mining stocks are still at attractive price points.

Meanwhile, Harvey told his clients to brace for a “trader’s market.” Again, his primary focus of this discussion is large-cap stocks in the S&P 500. He’s probably right, since a highly complacent market means a buy-and-hold position could yield subpar results in 2024.

So, pick your large-cap stocks carefully and be nimble; take profits frequently, and don’t be stubborn if a trade goes against you. On the other hand, if you’re investing in precious metals miners with good prospects, a buy-and-hold position could make a lot of sense for patient investors.