The Bullish Recession

2024's Economic and Stock Market Cycle

Recently, I have seen more “soft landing” narratives with the expectations that rates will come down faster. Now, it’s important to mention that when it comes to predicting rates, this is not necessarily my forte’. Instead, I like to think about it from an economic cycle perspective and incorporate that into, what I believe, is the likely path on the S&P 500. After all, rates really only matter (to me) because they impact stock prices as well as my personal cost to borrow.

This article will build upon my last publication, where I mentioned that I believe there will be a volatility event in 2024. It seems likely that the S&P 500 will reach the 200 week moving average at some point next year. If you missed it, below is the link.

A Bullish Recession

The next phase of the economic cycle is likely to bring volatility, where I believe that the S&P 500 will re-visit the 200 week moving average, which by my projections should be roughly inline with our recent low in October. I am of the impression that this will set up an enormous opportunity for long term investors to accumulate positions they didn’t have before as we set the next (and final) stage of consolidation before we reach/achieve all time highs and transition to a more sustainable bull market. To provide context, I believe the markets will look something like this (below) over the next few months.

The rationale why I believe this will occur is due to a few factors:

1. The yield curve is still inverted and it needs to un-invert. I believe that, in order to actually achieve a “landing”, we need to have credit conditions transfer from restrictive to accommodative. This is directly related to economic conditions necessary for revenue and earnings growth to flourish and accelerate. Historically, recessions begin *after* the yield curve un-inverts.

2. Rising unemployment seems very likely, as indicated by continuing claims. I could see that, in the months ahead, this is likely to become a more pronounced narrative. Rising unemployment = weakening consumer which will directly impact businesses ability to meet revenue and earnings expectations, particularly in the consumer facing businesses. I could see unemployment rising above the Fed’s 4.5% expectations.

   

3. Valuations are very elevated in large cap stocks as well as growth stocks. Below, you can see that large cap stocks are “expensive” with the forward P/E on the S&P 500 being very elevated. This is in conjunction with NTM EV/S ratios elevated in software. These levels are consistent with previous market peaks prior to the pandemic.

   

   

4. Market technicals are very overbought on a daily time frame. If we pull up previous times the S&P 500 reached these levels, we can see the market pulled back at the very least. Most of the time it set up a 10%+ decline even during periods we had $120b/month of QE initiated at 0% interest rates.

The Coming “Proper” Recession, Where Unemployment Rises, is Bullish and Necessary to Continue Our Bull Market

In the case of today, where we are transitioning from an inflationary market cycle to a deflationary market cycle, rising unemployment will actually be bullish. This isn’t necessarily because recessions are outright bullish but, in the case of today, this will be what brings the Feds off it’s hawkish pedestal into a more sustainable/accommodative stance. In other words, the inflation battle is likely to be won and the Fed can focus more on the “maximum employment” aspect to their dual mandate rather than the stable prices portion. Like I mentioned above, this will come at a “price” where the markets should correct in a meaningful fashion.

The yellow star (in the image) is approximately where I believe we are in the economic/market cycle.

The red star (in the below image) is where I believe we were in late 2021. The past 2 years, we have been slowly transitioning along the economic/market cycle.

How I Plan on Positioning my Portfolio

As many now know, I do share everything I do on a new platform called Savvy Trader. I am getting close to lapping my 1 year performance targets. Because I approached 2022 as the “year of accumulation”, it has been a wonderful year as the markets have rebounded from the recent bear market. Below, you can see my verified 3rd party results as well as the positions I currently have.

*Use Coupon Code “BlackFriday” to Access the Premium Version for $10/month for 3 Months*

In the days ahead, I am going to provide more updates (on Savvy) on how I plan on navigating the coming market down turn. You can see that I have already begun preparing as my cash position has now become a 7.4% position in my portfolio for the coming market decline. Historically, I don’t carry a very large cash position but in the case of today, it will be crucial to take advantage of the coming market decline to out perform in 2024 and beyond.

Looking forward, I do see the potential for a less volatile market in 2025 and beyond till our next major bear market. Even still then, we will be prepared as we navigate the market and economic cycle(s). I am excited to continue to share my wealth building journey with all of you for the next 30 years.

Stay Tuned, Stay Classy

Dillon