- The outlook for stocks has turned bullish, but forecasters still see a handful of big risks.
- Recession, debt bubbles and overvalued stock markets are obstacles.
- There are also a handful of low-probability outliers on Wall Street's radar.
Investors are feeling optimistic after the The Federal Reserve sent an important dovish signal to the markets this week, but stocks still face a cocktail of risks heading into the new year, Wall Street forecasters say.
Bearish predictions have become the counter-narrative of late as investors and analysts raise their expectations for Stocks will hit all-time highs next year..
Those predictions are based on the prospect that the Federal Reserve will begin cutting interest rates as early as the first quarter. In summarizing the central bank's economic projections at its meeting on Wednesday, officials hinted at 75 basis point rate cuts next year, a move that lifted the Dow Jones to a new all-time high this week.
But bullish sentiment should not overlook the risks the market still faces, and experts say there are still big obstacles to another major rally next year.
Below are some of what Wall Street sees as big risks for stocks in 2024.
1. Recession hits
Although the Federal Reserve is expected to reduce interest rates soon, the economy is still at risk of falling into a recession, thanks to the cumulative financial adjustment that has already taken place in the economy.
Even a "hint of recession" could send stocks tumbling, French bank Sociรฉtรฉ Gรฉnรฉrale warned, and there are parallels between today's market and conditions seen in 1987. That was the year the market was rocked on Black Monday, when The Dow Jones plummeted 22%. in a single negotiation session.
"The stock market's current resilience in the face of rising bond yields reminds me a lot of the events of 1987, when equity investors' optimism was finally crushed," strategists at the financial services firm said in a note. recent. They added that stocks could take a "devastating hit" if a recession were to hit.
That bearish view is shared by strategists at BCA Research, who warned that stocks could fall as much as 27% when the economy falls into a recession. Such a steep drop would mark the worst stock market decline since the 2008 financial crisis.
"This year a recession was delayed but not avoided in the US and the euro area. Developed markets (MD) remain on a recessionary path unless monetary policy is significantly eased. As such, the risk/risk balance reward is quite unfavorable for the stock," BCA said.
2. The debt bubble bursts
Universa Investments, a hedge fund that has "Black Swan" author Nassim Taleb as an advisor, recently predicted that stocks would fall even further than they did in 1929. This is due to a huge debt bubble that is brewing. formed in the markets when interest rates were ultra-low. which is sure to explode as borrowing costs remain higher for longer.
"We are in the biggest credit bubble in human history," said Universa chief investment officer Mark Spitznagel in an interview with Intelligencer. "It's entirely due to artificially low interest rates, artificial liquidity in the economy, which has really happened largely since the great financial crisis."
The markets saw a Wave of corporate debt defaults so far this year, as rates have risen and refinancing has become more expensive for businesses. An increasing pace of debt bankruptcies could spell trouble for stocks, and a tougher credit environment combined with a full-blown recession could result in Nearly $1 trillion in corporate debt defaultsBank of America previously estimated.
3. The highly valued S&P 500 experiences a major correction
Some parts of the S&P 500 appear overvalued. Ultra-low rates during the pandemic sparked a stock market frenzy that culminated this year in a wild rise in a select handful of stocks. Dubbed the "Magnificent Seven," these tech companies have seen massive investment this year, dwarfing the gains of the rest of the benchmark index.
As the era of extreme liquidity comes to an end, rates are likely to stay high for longer, even with the prospect of rate cuts next year. This could be bad news for some of the the most hyped stocks on the market.
Legendary investor Jeremy Grantham told Business Insider that The S&P 500 was expected to fall as much as 52%. in the worst case, thanks to a "super bubble" that is destined to burst. Such a steep drop could send the S&P 500 tumbling to 2,200, an even steeper drop than when stocks initially plunged in the early days of the pandemic.
Stocks seem too expensive that the market could plummet up to 60%, veteran investor John Hussman recently warned. He compared the current stock market environment to years like 1929 and 2000, just before the Great Depression and the bursting of the dot-com bubble.
"That's not a forecast, but it's certainly a historically consistent estimate of the potential downside risk created by more than a decade of Fed-induced yield-seeking speculation," he said in a research note. "Seat belt."
Fears of a stock market crash have been steadily rising even as the bullish chorus grows in the latter part of this year. According Yale Fall Confidence Index in US61% of institutional investors believe the chances of a 1987-style stock market crash are greater than 10%.
4. A Black Swan event
While Black Swan events are by nature unforeseen and therefore difficult to predict, there are some outlier scenarios that investors are watching that could spoil the party in the markets.
The risks of a black swan on par with something like the COVID-19 pandemic come primarily from the high level of geopolitical risk in the world as 2023 comes to a close.
Prominent economist and market doomsayer Nouriel Roubini noted in a recent op-ed Rising tensions between the United States and China. as one of those events that could trigger a calamity. Aggression between the superpowers could eventually degenerate into a full-blown war, which could be catastrophic for the global economy, Roubini warned.
"If they fail to reach a new understanding on the issues driving their current confrontation, they will eventually clash... That would lead inexorably to a military confrontation that would destroy the global economy, and could even escalate into an unconventional (nuclear) conflict. " according to the economist "Dr. Doom", known for his grandiose forecasts about Wall Street.
Conflict between Israel and HamasMeanwhile, it could also spread to the entire Middle East region, Roubini said in a recent interview with Bloomberg. The expansion of the conflict could cause oil prices to skyrocket, potentially triggering a stagflationary crisis in the West.
Roubini recently warned that a stagflationary crisis could cause investors to lose trillions of dollars over the next decade.
"It's not the basic scenario, but it's a risk," Roubini said shortly after the latest conflict between Israel and Hamas began in October. "Markets seem to be ruling out the possibility of a massive conflict for now," he added.
