A tumultuous year ahead awaits us

Last week’s Where is the Wall of Worry? blog pointed to the extreme bullish investor positioning in US stocks inspired by their expectation for a rapid Fed pivot next year. And to top it off in the final week, they abandoned all restraint and piled in with both feet to create the ninth straight week of up S&P closes – a record run. The charts are near vertical.

Extreme herding mentality has made this possible – and has set up the mother of all opportunities to profit from the coming collapse in sentiment and current valuations. That is for next year.

If you are feeling excited by the bullish prospects for your equity portfolio next year, just ask yourself if you have not been caught up in the emotion of the herd, egged on by the trend-following MSM and others. We humans love company as social animals – some more than others. But go to a football match and see herding in action! Stock market herding is quieter and appears under the hood.

But we know from long experience that when the herd is most confident they are correct, that is when reversals are most likely to occur. And because many bears are now bulls (see last week’s blog), who is left to buy to push shares even higher? Just one small reason to sell will be enough to catalyse an avalanche.

And we must not lose sight of the message from the two-year cycle Dow high chart

With the MSM trumpeting the stunning post-October 15% Dow rally to a new ATH in just two months. what more poetic time could there be for a reversal just when euphoric expectations are at manic levels?

So did late yesterday’s final data point of 2023 of the Chicago PMI be that catalyst? What a day to bury bad news when traders were heading home for the weekend! The numbers were dreadful with the index dropping from 55.8 (expansion) in November to just 46.9 (back to contraction) for the biggest monthly drop since Covid.

So will investors take this long weekend to digest that little horror, or will they blithely carry on as before (if they have any funds left after their post-October splurge)?

What’s in store for next year?

Looking to next year, I am quite sure that the many disruptions we saw in 2023 will explode in intensity in 2024. That is the first severe test of the status quo that has been in force for generations.

The most fundamental identity we humans have is gender. The distinction between male and female has been a pillar of our identities forever, But now that has come under threat with the noisy trans movement. You can now even buy tampons for men!

We are living through a once-in-a-100 year cycle of immense social and economic change. Most of the time it will be a slow burn and most will be unaware it is progressing at all. But at other times, the shocks will be sudden and felt around the world.

The last one was also tumultuous and was around the 1920s/1030s which saw a new world order after WW1 that saw the rise of the USA as the global leader from an also-ran before. European nations dominated but after the war, they were beaten and their influence much diminished. And it saw the greatest stock market crash in history and the Great Depression.

And it saw the historic emergence of women from the confines of the kitchen to the factory and office – and wearing men’s trousers (for the upper classes).

Today we have a new Middle East war that should involve more nations. And a war in Europe. And immigration has become a major headache for the USA and Europe.

We now have a highly politicised science establishment especially in ‘climate change’. Before, the pursuit of science was strictly along the classic scientific method principles. Now, many are goal-seeked to satisfy the demands of the big money grants that are controlled by huge political forces.

Imagine a scientist today getting funds for a research project that concludes that CO2 is a benign trace plant food gas that has little if any global warming effects. Even less if it concludes that CO2 atmospheric concentrations actually lag natural global temperature changes, not the assumed reverse causality.

just as likely as being refused lavish (taxpayer) funds for any hairbrained project that supports the opposite!

And there is the prospect of a return to the White House of The Donald after what promises to be one of the most tumultuous and violent election campaigns in US history. This prospect is getting little MSM coverage now but will later next year.

He is a known sceptic of Net Zero and a supporter of oil and gas production in the US (already the world’s number one producer of both) with probably a large headwind to major price gains.

And he will almost certainly demolish much of Bidenomics and the huge subsidies for Net Zero projects – and help collapse more of the start-up Net Zero shares (many have gone bust already).

Nasdaq – be warned!

So leading up to the election, we shall see wide swings in financial markets which will make them just as tricky in 2024 as they were in 2023.

Just take a look at the above Dow chart. The bull run in 2020 and 2021 was relatively sedate with minor pull-backs. But in 2023, there were huge bull and bear swings of 4,000 points making trading long term difficult-to-impossible. Of course, the MSM smooth over these wild swings and make the year from Jan to Dec as a big win for the bulls.

MSM pundits are making their reviews of the past year but most are ignoring the huge gyrations and claim a great year from Jan 1 to Dec 29. But if they had bought Tesla on Jan 1 (at $104) and rode it up to the July $300 high – and then saw it fall back to the $200 October low for a 33% loss, then move back up to the current $250, then a spread better on margin would have had nightmares with these moves.

At the October $200 low, would anyone be tempted to take the profit and run? You bet, with all the ‘bad’ news swirling around the company then.

While one dead duck does not a winter make, the Chicago PMI may be the leading edge indicating a more general economic slowdown, despite any Fed pivots.

In fact, the next Fed pivot, if it comes early enough, may be a ‘good news is bad’ signal to investors that the economy is slowing much faster than their ‘soft landing’ assumed – in stark contrast to the ‘good news is good’ theme they assumed when they piled into equities post-October.

Thus, I see the very real prospect of a slowing economy – first kicked off by the working through of the sharp interest rate hikes of 2021/2023 (they are still high!) with a lot more corporate bankruptcies in 2024 – weaker commodities (ex-gold), and weaker equities.

The weaker commodity scenario would negatively impact the FTSE 100, of course. It currently trades around the 7,760 (slightly under the 8,030 ATH) and remains in a wave 2 up correction.

I see this index as being extremely vulnerable as world trade slows.

And if commodities do trend lower (watch Dr Copper!), inflation numbers would fall. But this time, falling inflation would not be good news for shares, as they are assumed currently. It would point to a recession/depression.

With turmoil in the markets, I expect gold to remain in bull trends.

Of course, cryptos have had a stellar year, particularly at the latter part. That is all part and parcel of the general manic bullish sentiment. And I see that the NFT (non fungible tokens) sector is rearing its head again as they rise from the ashes of late 2022.

This is an index of leading companies aligned to NFTs. Remember, an NFT is a digital object that can be copied ad infinitum.’Nuff said, I think.

Popular culture

Popular culture has a lot to say about the state of society -and the world of finance – in general. We have the ‘hemline indicator’ I mentioned a while ago. The latest fashions have hemlines so high, they have vanished and only the knickers are showing! Folks, this is as high as they could possibly get – a hint to investors?

As a very long time observer, I ask is popular music going through a fallow period ahead of a transformation as it did 100 years ago? Two female artists dominate and to my ears, their music is derivative, not cutting edge (as were the Beatles sixty years ago that shook up pop music, and jazz one hundred years ago).

At the last 100-year cycle, the radical new jazz music leaped into the mainstream from nowhere leading to the ubiquitous sophisticated swing and big bands of Glenn Miller and Benny Goodman that dominated the music industry of the 1930s.

Previously, popular music centred around Victorian drawing room ballads (for the upper middle classes) with an upright piano, or the more bawdy Music Hall (for the lower classes).

Ballroom dances (a much tamer version of Strictly) were held everywhere on Saturday nights. That is where boys met girls. I actually played in several dance and jazz bands.

Today, where do young people meet up in the absence of these vast social gatherings? Online? With WFH, they are unlikely to meet at the office. Maybe at University.

One result is the declining native birth rate (in common with all Western nations) with immigrants who are more fertile filling the gap, as the politicians wish.

As for movies, fantasy rules. Barbie is a leading contender for the Oscar and although I have yet to see it, it appears to be about a doll being the main character supported by infantile males. Pink seems to be the theme colour. Perhaps that mirrors society today.

I can make a pretty good case that traditional TV and radio has ‘dumbed down’ its output for years and often acts as a soporific for those of more advanced years.

No, the broad picture is that sections of YouTube and its ilk are moving into the space being vacated by the traditional media. Content provided by many amateurs is more balanced and substantive. So please don’t get me started on the BBC!

Just as the late October Dow lows heralded a major surprise, I believe 2024 will continue that tradition – only more so. Expect fireworks – and very likely soon.

One final thought – US stocks are overstretched while Chinese stocks aren’t. A short S&P/long China could well work out for 2024.

Here’s to an exciting 2024 – and my New Year’s Resolution? When you reach a crossroads – take it! (thanks to Yogi Berra).