My 2024 outlook; Positive sentiment on Wall Street; Market valuation is high; Investors' fears; Why I remain constructive

A year ago, it was easy sharing my outlook for 2023...

After a truly dreadful year in the markets – in which the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite Index tumbled 9%, 18%, and 33%, respectively, and the average retail investor's portfolio fell a shocking 44% – investor sentiment was terrible.

In light of this, my natural contrarian nature had me "trembling with greed." I was finding cheap stocks everywhere – especially among big-cap tech – and I was super bullish.

Today, the situation is far different...

The Dow, S&P 500, and Nasdaq soared 14%, 24%, and 43%, respectively, last year to recoup their losses, and investor sentiment has reversed, as you can see in this chart from Charlie Bilello's recent Week in Charts:

The shift has been particularly dramatic among active managers in the past few months, as they had only 25% exposure to equities in late October but then piled in – driving and chasing the market upward at the end of the year, finishing with 103% exposure. Here's a post on X, formerly Twitter, from Bilello with the relevant chart:

This Wall Street Journal article captures the widespread bullishness: Optimism Abounds on Wall Street This New Year. Excerpt:

Most investors are expecting the good times to continue.

A survey conducted in December by BofA Securities found that fund managers were more optimistic than in any month since January 2022, which coincides with the S&P 500's last all-time high. The group is collectively the most bullish on stocks since February 2022.

More than 90% of participants, who collectively manage $691 billion of assets, predicted the Fed is done raising interest rates. More than 60% said they expect lower bond yields in a year, a record high for the survey.

Such universal positive sentiment is often a harbinger of future poor returns, especially when valuations are high.

According to the two most common measures I follow, valuations, while not at all-time peaks, are more than one standard deviation above the long-term average. Here's the Buffett Indicator Model from Current Market Valuation, which is the ratio of the total value of the U.S. stock market versus total U.S. GDP:

And here's the Price/Earnings Model from Current Market Valuation, which is the total value of the U.S. stock market divided by the average corporate earnings over the past decade:

Lastly, it seems like we live in a particularly dangerous time, with two major wars underway, the possibility of a third between China and Taiwan, upcoming elections, the possibility of a recession and/or credit crisis, large deficits and a ballooning national debt, etc.

This chart captures the biggest worries recently cited by Investopedia readers:

So, in light of all this, it must be time to sell stocks and hunker down in the world's safest investment – short-dated U.S. Treasurys – and collect a healthy yield (currently 5.3% and 4.8% for six- and 12-month bills, respectively), right?

No.

While I'm nowhere near as bullish as I was a year ago, I remain cautiously optimistic – I like the word "constructive" – on stocks, for a variety of reasons.

Most important, the U.S. economy is doing extraordinary well. GDP growth was an exceptional 4.9% last quarter, unemployment remains near all-time lows, inflation has been beaten, wage growth is outpacing inflation so consumers are spending strongly, and corporate profits are robust.

And just because the market had a good year doesn't mean it will be followed by a bad one. In fact, just the opposite has been true historically. Going back nearly a century, the S&P 500 has risen 73% of the time overall. In this post on X, Bilello shares the data:

And the Dow is currently on an 11-year run in which it has hit an all-time high each year... Take a look at this table from Bilello:

Speaking of all-time highs, our national debt has been hitting one seemingly every month, which is causing some investors to predict a calamity for stocks. But, in fact, the opposite has been true historically: Our national debt keeps rising, and so do stocks. Here's another recent chart from Bilello on this:

While investors are bullish, Wall Street strategists are predicting that the S&P 500 will be down in 2024, which I view as a contrarian indicator. In his recent Week in Charts, Bilello shared this Bloomberg chart:

Lastly, presidential election years have been particularly good for stocks. I don't think this is a spurious correlation but instead due to politicians taking measures like increasing spending to boost the economy.

Regardless of the reason, the fact is that in the 24 election years since 1928, the S&P 500 has risen 20 times – an extraordinary 83% of the time – with an average gain of 11.6%, well above the 9.8% average over the entire period.

And here's even better news for those hoping a Republican will be elected: When a Democrat was the incumbent and a Democrat wins, the average return is 11.0%, but when the White House switches parties, the average return is 12.9%.

In summary, the biggest mistakes I've made in my investing career involve becoming bearish too early and battening down the hatches when the skies are still sunny.

Yes, once or twice a decade, when the skies are black and it's clear that a major storm is about to hit, it makes sense to play defense – and one should always avoid the silliest, most over-hyped sectors like meme stocks and SPACs in 2021 and, I'd argue, crypto today...

But otherwise, investors are well served to ignore the short-term noise and keep their long-term assets concentrated in high-quality stocks.

Along those lines, that's exactly what my team and I are looking for in our Stansberry's Investment Advisory newsletter – where I just recently took on the lead editor role. In fact, the next monthly issue with my contributions and analysis is publishing this Friday after the market close.

Last month's issue featured my first recommendation since joining the team – and this world-class stock is still trading below our recommended buy-up-to price.

To find out how to put yourself on the list to receive the next Investment Advisory issue when it publishes on Friday – and gain access to the entire portfolio of open recommendations – click here.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.