- While the outlook for the stock has become more bullish, forecasters still see some major risks.
- Recessions, debt bubbles and overvalued stock markets are headwinds.
- There are also some low-probability outlier events on Wall Street’s radar.
Investors have become bullish after the Federal Reserve sent dovish signals to the market this week, but stocks still face a range of risks heading into the new year, he said. Wall Street forecasters say.
Bearish predictions have recently become a paradox, as investors and analysts increasingly expect stocks to reach all-time highs next year.
These forecasts are based on expectations that the Fed will begin cutting interest rates as early as the first quarter. In the central bank’s summary of economic forecasts at Wednesday’s meeting, officials signaled a 75 basis point rate cut next year, sending the Dow Jones Industrial Average temporarily higher. This week marks a new all-time high.
However, the bullish mood should not overshadow the risks still facing the market, with experts saying there are still significant headwinds to another big rally next year.
Here are some of the things Wall Street sees as big risks for stocks in 2024.
1. The recession hits
Although the Fed is expected to lower interest rates soon, the economy remains at risk of slipping into recession thanks to the cumulative monetary tightening already occurring in the economy.
French bank Société Générale has warned that even “signs of recession” could cause share prices to plummet, warning there are similarities between the current market and the situation in 1987. That year was a year of market turmoil with Black Monday, when the Dow Jones Industrial Average plummeted 22%. in a single trading session.
“The current resilience of the stock market in the face of rising bond yields is very reminiscent of the events of 1987, when stock investors’ bullish stance was ultimately dashed,” strategists at a financial services firm recently wrote. stated in the memo. They added that if a recession occurs, stock prices could be “devastated.”
This bearish view is echoed by strategists at BCA Research, who warn that stocks could plummet by as much as 27% if the economy slips into recession. A fall this steep would be the worst stock market crash since the 2008 financial crisis.
“Recessions in the US and the euro area were delayed this year but were not avoided. Unless monetary policy eases significantly, developed markets (DM) will remain on a recessionary trajectory. This is very unfavorable for stocks,” BCA said. Said.
2. Bursting the debt bubble
Universa Investments, a hedge fund whose advisors include “Black Swan” author Nassim Taleb, recently predicted that stock prices will fall even more sharply than they did in 1929. The reason for this is that a huge debt bubble was formed in the market during the era of ultra-low interest rates. These rates are expected to burst as borrowing costs remain high for an extended period of time.
“We are in the biggest credit bubble in human history,” Mark Spitznagel, Universa’s chief investment officer, said in an interview with the Intelligencer. “That’s entirely because of artificially low interest rates and artificial liquidity in the economy, which has really happened on a large scale since the Great Financial Crisis.”
The market has seen a spate of corporate defaults since the beginning of this year as interest rates have risen and refinancing costs have become more expensive for companies. Bank of America has previously said that a worsening pace of debt failures could cause problems for its stock, with corporate defaults reaching nearly $1 trillion as a full-blown recession and tough credit conditions combine. I expected it to be possible.
3. Big correction seen in highly valued S&P 500
Parts of the S&P 500 appear overvalued. Ultra-low interest rates during the pandemic have sparked a stock market frenzy that culminated in a ferocious rally for some stocks this year. These tech companies, known as the Magnificent Seven, have made huge investments this year, outpacing the gains of other stocks in the benchmark index.
As the era of extreme liquidity comes to an end, interest rates are likely to remain high for an extended period of time, despite the prospect of rate cuts next year. This could be bad news for some of the market’s most hyped stocks.
Legendary investor Jeremy Grantham told Business Insider: S&P 500 expected to fall by up to 52% In the worst case scenario, this is thanks to the “super bubble” that is sure to burst. Such a sharp drop could send the S&P 500 index plummeting to 2,200, potentially even more sharply than during the stock market crash at the beginning of the pandemic.
Veteran investor John Husman recently warned that the stock looked so expensive that the market could crash by as much as 60%. He compared the current stock environment to years like 1929 and 2000, just before the Great Depression and the bursting of the dot-com bubble.
“While this is not a prediction, it is certainly a historically consistent estimate of the potential downside risk created by more than a decade of yield-seeking speculation at the Fed,” he wrote in a research note. Stated. “Fasten your seat belt.”
Concerns about a stock market crash are steadily increasing as bullish sentiment grows later this year.according to Yale University American Crash Reliability Index61% of institutional investors think the probability of a 1987-style stock market crash is greater than 10%.
4. Black Swan Event
While black swan events are difficult to predict due to their unexpected nature, there are several outlier scenarios investors are watching that could spoil the market party. there is.
The risk of a black swan event comparable to something like the COVID-19 pandemic is primarily due to the high level of geopolitical risk in the world as 2023 approaches its end.
As Nouriel Roubini, a top economist and market prognosticator, pointed out in a recent op-ed: Tensions rise between the US and China As one of the events that can cause a disaster. Roubini warned that aggression between superpowers could eventually escalate into a full-scale war, with devastating effects on the global economy.
“If the two countries fail to come to a new understanding on the issues driving their current conflict, they will eventually come to blows… which will lead inexorably to military conflict, destroy the global economy, and It could even escalate to a non-traditional (nuclear) conflict,” says the “Dr. Doom” economist known for his wild predictions on Wall Street.
Meanwhile, Roubini said in a recent interview with Bloomberg that the conflict between Israel and Hamas could spill over into the entire Middle East region. Escalation of the conflict could cause oil prices to soar and trigger a stagflation crisis in Western countries.
Roubini recently warned that the stagflation crisis could cost investors trillions of dollars over the next decade.
“This is not a base case scenario, but it is a risk,” Roubini said shortly after the latest conflict between Israel and Hamas began in October. “Markets seem to be downplaying the possibility of a major conflict for now,” he added.
