2024 Market Outlook - Part I

Today is a BIG DAY!

You are reading the very first issue ever of HX Daily. 

This newsletter is the culmination of 30 years of my career and life. It combines my interests, experience, and passions.

Most of all, it allows us to fulfill a mission we started five years ago, take our accumulated investment experience plus market knowledge, and bring it to everyday investors with actionable ideas. We want to allow people to change their financial futures and lives positively.

Thank you for being a part of this very first issue. Let's get to it!

2024 Market Outlook – Part I

Wow – what a ride it has been the last two years in the stock market!

We say that, but the reality is that across my thirty years in the stock market, it has always been crazy. The type of "crazy" will depend on the period, but there is always some crazy happening.

Thinking back to when we first started in the newsletter business five years ago, it has been a fascinating period. We published our first newsletter in September 2019, and six months later, we (and the entire world) saw something that had never been seen before…

Of course, we are talking about COVID.

Now that a few years have passed, it is interesting to take a step back and think about what happened.

In just a few weeks, the entire planet shut down the vast majority of economic activity and human interaction. Then, it decided to keep it shut or restricted at some level for the majority of the next couple of years.

Imagine trying to explain what this was really like to your children or grandchildren in the future.

Hopefully, something like it will never happen again, but it was truly unprecedented.

There is a famous saying on Wall Street that "this time isn't different.” 

The idea is that there are patterns in economics and financial markets that reoccur. Every stock market bubble is built on the idea that this time IS different, but inevitably, they play at the same.

The details might differ, but the result is the same.

In contrast, the global COVID shutdowns were DIFFERENT.

We never saw anything like it, and hopefully, we never see it again.

What does this have to do with our 2024 Market Outlook?

It matters because we are still seeing the impacts of the COVID shutdowns even today, and they are impacting our ability to understand the path of the financial markets.

The analogy I like to use for the COVID shutdowns is to imagine you had a car that runs well with no problems.

Then imagine plunging that car into a frozen lake, a lake so cold that somehow the car falls in and is instantly frozen in a block of ice.

Then you take that car out and thaw it out. Amazingly, since it froze so quickly, it seems to work quite well.

Sure, you must put some oil in it and clean some things up. This was the monetary and fiscal stimulus.

Overall, the car is ready to go, and you can drive it down the street with no problem!

A week later, you start getting warning lights you had never seen go off. You go into the shop, and for the first time, there is a minor problem, something they had never seen but was fixable.

The same thing happens the next week and the week after.

None of the problems are significant, and the car still runs well. It is more annoying than anything else and costs you extra money.

Each time, though, the auto mechanic scratches his head and says he has never seen anything quite like what has happened. It's still the same car with the same problems as before, but he has never seen them occur like they do now.

THIS is what has happened with the global economy and financial markets.

We took the car engine and threw it into a frozen lake, where it turned into a block of ice. We opened it a few months later and put some oil and gas into it.

To our surprise, it roared back amazingly…

Across the last few years, however, it has been doing some weird stuff. This time WAS different!

Since 2020, analysts have been digesting the financial data and seeing a combination of signals we have never seen before.

Two groups of these signals are potent and point in opposite directions.

The first group of signals is around what has happened to interest rates and global monetary liquidity.

“Global monetary liquidity” means how much cash government central banks are willing to pump into the economy. Around and after COVID, they put in a ton of cash, which helped drive inflation. Now, they want to pull some of that cash out to lower inflation and cool the economy down.

We could write thousands of words on this subject. Still, we want to key in on the super powerful signal from the movement in interest rates – the yield curve inversion.

"Yield curve inversion" describes when short-term interest rates (the rate the government will pay on 3-month bonds) are higher than the long-term rates (the rate the government will pay on 10-year bonds).

We will publish a note going through all these details soon, but short-term rates are higher than long-term rates. We have "yield curve inversion."

Here is a chart showing the spread between 3-month and 10-year interest rates…

We have added a red line at zero. Below the red line, the yield curve is “inverted.”

You will notice that the yield curve is not inverted very often. Across the 35 years in this chart, it has inverted for only a few short periods – back in 2000/01, 2006/7, and here recently.

It has not been inverted for very long, but when it has been inverted, it has been right before the stock market was crushed!

Here is a chart of the S&P 500 chart during both of those periods…

Many of you remember these periods, but these were some nasty times to be in the stock market.

We could dive into the economic and historical significance of an “inverted” yield curve and its impacts a lot more (and we will in future notes), but for now, let’s stick with the fact that it is a powerful signal that indicates there could be trouble ahead of the stock market.

There is another exciting and powerful signal around interest rates – which has driven the inversion – and this level of short-term rates set by the US central bank – the Federal Reserve Bank. This is called the “Fed Funds Rate.”

Below is a chart of that rate through time..

You can see the recent rapid rise in interest rates from 0% to the current 5.5%. You will also see a rapid rise during the other recent periods of yield curve inversion, although 2000/1 was small.

The key here is that when the Fed raises rates very rapidly, it can shake up a lot of pre-existing financial structures.

Many companies had loans paying low-interest rates (say 3%), and now they are paying more than double that (say 10%), which has a real impact on their business. The same is true for ordinary folks.

Companies and people can adjust if this rate change happens over several years. However, it can be challenging to adjust when it happens in just months (or a year in this case).

When rates move quickly, all sorts of damage can happen to the economy and financial markets.

It's like throwing an engine into a freezing river and a block of ice!

Historically, these two signals would overwhelmingly indicate that the stock market in 2024 is in big trouble.

We are unsure…and will discuss more in tomorrow's HX Daily.

What we do know, however, is that here at HX Research, we are prepared.

Our trading products – HX Trader and HX Income – are built to deal with challenging markets.

Back in 2022, the predecessor product to HX Trader (Empire Elite Trader), we had 73 recommendations, and all of them were long positions. Not a single short position or short exposure.

Across those positions, we made money on 74% of them and produced a +8.3% total return.

It's not a huge return, but remember, the stock market got destroyed that year! The S&P 500 was down nearly 20% and the NASDAQ Composite Index was 33%.

IF these indicators are correct and 2024 is a challenging year for the stock market, our readers will be prepared!

You can check out a free issue of both of those publications here.

Tomorrow, we will discuss the other powerful indicators that paint a different picture.