The Deep Woods: Avoid the Folly of Market Assumptions

You are receiving this email because you signed up to receive our free e-letter The Deep Woods, or you purchased a product or service from its publisher, Eagle Financial Publications. [The Deep Woods] [Successful Investing]( [I]([ntelligence Report]( [Bullseye Stock Trader]( [About Jim]( In This Issue: • Avoid the Folly of Market Assumptions • ETF Talk: Automize Your Profits With This Innovative ETF • The Two Big Changes in 2024 • The Virtue of Contempt Avoid the Folly of Market Assumptions by Jim Woods Editor, [Successful Investing](, [Intelligence Report]( & [Bullseye Stock Trader]( 01/03/2024 Sponsored Content [$6,000,000,000,000?]( ~$6 TRILLION: Ex-Wall Street Insider Says: "America's First Cash Bubble Could Start to Pop." [Click Here For More Details...]( You know what they say about assumptions? That’s right, they can make a “you-know-what” out of “u” and “me.” Unfortunately, when it comes to markets, the folly of assumptions can do just that to many a confident and otherwise sophisticated investor. For example, just think about where we were last year at this time. The S&P 500 had just logged its worst annual performance since the financial crisis, the Federal Reserve was in the midst of the most aggressive rate hike campaign in decades, inflation was above 6% and concerns about an imminent recession were pervasive across Wall Street. That bearish cocktail conjured market assumptions of more doom and gloom for 2023, one where the bears would devastate the bulls for a second consecutive year. Of course, we all know what happened. The S&P 500 finished the year with a gain north of 24%, while the Nasdaq Composite soared nearly 44%. Today, the market outlook couldn’t be much more positive than it was a year ago. The Fed is done with rate hikes and rate cuts are on the way, likely in early 2024. Economic growth has proven more resilient than most could have expected, and fears of a recession are all but dead. Inflation dropped substantially in 2023 and is not far from the Fed’s target, and corporate earnings growth is expected to resume this year. So, yes, we are definitely in a more positive environment for investors compared to the start of 2023. However, just like overly pessimistic assumptions for 2023 proved incorrect, as we look ahead to 2024, we must guard against overly optimistic assumptions, because at current levels, both stocks and bonds have priced in a lot of positives in the new year. Consider first that the S&P 500 is starting 2024 trading at a very lofty 19.5X valuation. Now, I’m not saying that valuation is unjustified, but I will say that valuation makes several positive assumptions about critical market influences in the coming year. How reality matches up with those assumptions will determine whether stocks extend the rally (and the S&P 500 hits new highs and makes a run at 5,000) or gives back much of the Q4 Santa Claus rally. In a recent issue of my daily market briefing, [Eagle Eye Opener](, we defined the five most important assumptions investors are making right now, because it’s how reality plays out versus these assumptions that will determine if stocks and other assets rise or fall in Q1 and 2024. Let’s take a look at each now. Assumption 1: Fed cuts rate six times for 150 basis points of easing and a year-end Fed Funds rate below 4.0%. The main factor behind the S&P 500’s big Q4 rally was the assumption that the Fed was done with rate hikes and would be cutting rates early and aggressively in 2024. How do we know this is a market assumption? Fed fund futures. According to Fed fund futures, there’s a 70%-ish probability the Fed fund rates finishes 2024 between 3.50-4.00%. Assumption 2: No Economic Slowdown. Markets haven’t just priced in a soft landing, they’ve priced in effectively no economic slowdown as investors expect growth to remain resilient and inflation to decline, the oft-mentioned “Immaculate Disinflation,” a concept that’s possible, but to my knowledge has never actually happened. How do we know this is a market assumption? The market multiple. The S&P 500 is trading at 19.5X the $245 expected S&P 500 earnings expectation. A 19.5X multiple is one that assumes zero economic slowdown (if markets were expecting a mild slowdown, a 17-18X multiple would be more appropriate). Assumption 3: Solid earnings growth. Markets are expecting above average earnings growth for the S&P 500 to help power further gains in stocks. How do we know this is a market assumption? The consensus expectations for 2024 S&P 500 earnings per share are mostly between $245-250. That’s nearly 10% higher than the currently expected $225-per-share earnings for last year (2023), which points to very strong annual corporate earnings growth. Assumption 4: No additional geopolitical turmoil. Despite the ongoing Russia/Ukraine war, Israel/Hamas conflict and escalating tensions between the U.S.- and Iranian-backed militias throughout the Middle East, the market’s assuming no material increase in geopolitical turmoil. How do we know this is a market assumption? Oil prices. If markets were nervous about geopolitics, Brent Crude prices would be solidly higher than the current $77/bbl. Oil prices in the high $80s to low $90s reflect elevated geopolitical concern while prices above $100/bbl reflect real worry. Assumption 5: No domestic political chaos. This is an election year in the United States. Republican front-runner Donald Trump is facing a long list of various civil and criminal charges along with challenges to whether his name will be on the ballot in certain states. Meanwhile, there has been no long-term compromise on funding the government, so shutdown scares remain a real possibility. And that’s before we get into the heart of election season later this year. How do we know this is a market assumption? Treasury yields. A 3.80%-ish yield on the 10-year Treasury does not reflect much domestic political angst. If markets become nervous about the U.S. political situation and/or fiscal situation in the United States, the 10-year yield would be sharply higher than it is now (well above 4.00%, like we saw in the late summer/early fall). Bottom line, these market assumptions aren’t necessarily wrong. Events could unfold the way the market currently expects. But these assumptions are aggressively optimistic, and it is how events unfold versus these expectations that will determine how stocks and bonds trade to start the year. If you’d like analysis such as this in your inbox every trading day, and if you want to avoid the folly of market assumptions, then I invite you to check out the [Eagle Eye Opener](, right now. For the cost of a morning latte, you’ll be completely up to speed on all of the essentials you need to thoroughly understand this dynamic market, and to avoid falling victim to overly pessimistic and overly optimistic assumptions. [The Perfect Portfolio: No Losses, 14X Gains]( I want to share with you something very important… and very simple. I’m talking about a 3-stock strategy that’s been immune to market losses over the past two decades… while outperforming the S&P 500 by 1,461% during that same time. That’s no losing years plus 14X gains. I call it the “Perfect Portfolio.” [Click here now for all the details.]( ETF Talk: Automize Your Profits With This Innovative ETF With artificial intelligence (AI) taking up so much headline space, it might be easy to simply label it as a temporary market trend. However, this could not be further from the truth. While the boom in AI is recent, it has its roots in the broader trend of autonomous technology, an industry that has been growing for several years now. Autonomous technology is a general term used to describe technology that can accomplish tasks without the need for human input. This includes AI systems, as well as physical technologies such as robotics and self-driving cars. Autonomous devices have been utilized in the automobile and manufacturing industries for years and have recently begun to expand into other industries such as health care. As demand for speed and efficiency grows, automated technologies are quickly becoming not only a vital part of numerous industries, but of our day-to-day lives as well. And with AI now standing as a prominent component of autonomous technology, the need for automation is more prevalent than ever. The autonomous technology market is thriving, and no investment is better suited to take advantage of that than the ARK Autonomous Technology & Robotics ETF (ARKQ). Established in 2014 by ARK Investment Management LP, ARKQ is an actively managed fund that invests solely in companies that benefit from technological advancements, especially automation. Companies held by ARKQ are both focused on and expected to benefit from technological improvements, research and products and services related to energy, automation and manufacturing, materials, transportation and, of course, AI. The fund uses its own internal analysis to select companies that capitalize on disruptive innovation to spur advances in their respective markets. At present, ARKQ has an average market cap of $173.01 billion, and has $1.06 billion in assets under management. The fund’s current expense ratio is 0.75%. The majority of ARKQ’s holdings are U.S. based, making up 87.79% of the total. The fund’s additional holdings are in Japan (3.47%), Canada (3.26%), Taiwan (1.91%), Israel (1.69%), Hong Kong (1.25%) and Belgium (0.63%). ARKQ’s primary market sectors include electronic technologies (37.47%), technology services (26.70%), consumer durables (12.44%), producer manufacturing (12.17%) and communications (6.54%). Its current top 10 holdings are Tesla, Inc. (TSLA), UiPath, Inc. Class A (PATH), Kratos Defense & Security Solutions, Inc. (KTOS), Trimble Inc. (TRMB), Teradyne, Inc. (TER), Iridium Communications Inc. (IRDM), Archer Aviation Inc Class A (ACHR), AeroVironment, Inc. (AVAV), Deere & Company (DE) and Komatsu Ltd. Sponsored ADR (KMTUY). Courtesy of [www.stockcharts.com]( As of Jan. 2, the fund is up 2.53% in the past month, 8.25% in the past three months and 37.60% year to date. While autonomous tech is making our lives easier than ever, it is important to not automize your investment decisions. Remember to always consider your personal financial situation and goals before making any investment. Investors are always encouraged to do their due diligence before adding any stock or exchange-traded fund (ETF) to their portfolios. Finally, remember that I am happy to answer any of your questions about ETFs, so do not hesitate to [send me an email](mailto:askjim@successfuletfinvesting.com). You may just see your question answered in a future ETF Talk. [Warning: America on the Brink of Financial Crisis!]( Traders who make money understand the need to optimize their trading strategy to capitalize on every opportunity that comes their way. [Count On This Dual-Patented A.I. Trading Tool (Learn for FREE Now) >>]( In case you missed it… The Two Big Changes in 2024 One of my favorite aspects of what I do is that every year in markets is different. Indeed, unlike so many other businesses, the circumstances of every market year change, and often quite dramatically. Hey, it’s one of the reasons this is such an interesting business. In a recent issue of my morning briefing, [Eagle Eye Opener](, we covered two of the most important changes from the current year that I anticipate occurring in 2024. This week, I want to share those thoughts with you, The Deep Woods reader, because these changes mean that events that were tailwinds for stocks in 2023 will become neutral to potentially negative in 2024. How will that be? And what are those two changes? I’m glad you asked. The first big change is that falling bond yields will no longer be positive for stocks. Now, consider that there were two overarching reasons for the rally in 2023: The first was artificial intelligence (AI) enthusiasm powering the “Magnificent Seven” stocks higher and pulling the S&P 500 higher with it. The second was expectation of a dovish Fed pivot that essentially saved the 2023 rally in late October. Falling interest rates were a clear positive in 2023 because they eased valuation headwinds and signaled that Fed hikes were ending, which reduced recession chances. But as we start 2024, the dovish Fed pivot is now fully priced into stocks with the S&P 500 just under 4,800, and the market now has priced in six Fed rate cuts and a year-end 2024 Fed funds rate below 4%. So, the dovish pivot and expected easing of monetary policy is already priced into stocks and Treasuries. If we see the 10-year Treasury Note yield continue to fall to the low-3% or sub-3% range, that’s not going to be a major tailwind for stocks, because that won’t be forecasting a dovish Fed, it’ll be forecasting slowing economic growth. And those falling yields will then become a harbinger of a potential economic slowdown, and not the welcomed signal of a Fed that’s finally turning dovish. The second big change is that earnings results won’t have low expectations to excuse poor performance. Earnings from companies in the S&P 500 weren’t particularly great in 2023, but they were much better than some of the awful expectations that were prevalent when the year started. To put some numbers on it, many analysts penciled in 2023 S&P 500 earnings between $220 and $225. But there was a definite minority that had estimates much lower, anywhere from $185 to $215, as these analysts expected the recession that never appeared. As we start 2024, it’s the total opposite. Consensus S&P 500 earnings growth is nearly 10% year over year, well above the long-term averages of around 5%-ish annual growth. And keep in mind, at 4,800, the S&P 500 is trading over 19.5X that $245 earnings estimate, which means there’s little room for disappointment from a valuation perspective. The point here is that just “okay” earnings won’t be good enough to drive stocks higher, and we got a preview of that in the third-quarter numbers (which weren’t great) and especially in December, as earnings results were generally poor. Now, that doesn’t mean the upcoming fourth-quarter earnings season (which begins in mid-January) won’t be positive, but for it to be positive it’ll have to be because of actual good results, not just better-than-feared results that were good enough in 2023. The bottom line here is that markets will need something “new” to power stocks higher in 2024, because the dovish pivot (which powered stocks higher since October) is fully accounted for, while low expectations for earnings and economic growth no longer exist. That doesn’t mean we won’t get new, positive influences on stocks, but it will have to come from something new in 2024, because the low hanging fruit of a dovish pivot and not-as-bad-as-feared earnings have already been picked to fuel the Santa rally. ***************************************************************** The Virtue of Contempt “Contempt is not a thing to be despised.” --Edmund Burke I generally try to avoid feelings of contempt, as they tend to cast a pall on one’s psyche. However, some things deserve contempt, and it’s not wrong to recognize that. For example, bad anti-life ideas that are anathema to human flourishing are deserving of contempt. Con men, fraudsters and prophets of doom are deserving of contempt, as are the many charlatans hawking the latest “life hack” guaranteed to make you whole if only you subscribe to their “members only” YouTube channel. Of course, a general sense of contempt for the world is a bad thing. But having rational, well-placed contempt that’s earned by the facts of reality isn’t a thing to despise -- it’s a virtue to cultivate. It’s only by cultivating a sense of contempt for bad ideas that we can promulgate really good ideas -- and really good ideas are what we all need in order to maximize human flourishing. Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. [Click here](mailto:askjim@successfuletfinvesting.com) to ask Jim. In the name of the best within us, [Jim Woods] Jim Woods Editor, Successful Investing & Intelligence Report About Jim Woods: [Jim Woods]Jim Woods has more than 25 years experience in the markets, as a stock broker, hedge fund money manager, author, speaker and independent analyst. Today Jim serves as editor and investment director of the long-running newsletters [Successful Investing](, the [Intelligence Report](, [Bullseye Stock Trader]( and a new Live Coaching service offered exclusively to his readers. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, and many others. About Us: Eagle Financial Publications is located in Washington, D.C. – only a few blocks from the Capitol. Our products have been helping investors build their wealth for several decades. 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